Wow, the market isn't going straight up anymore. While we've certainly seen pullbacks during the now six-month rally, the drop in the broader indexes. like the S&P 500 and its tracking exchange traded fund SPY, of nearly 5%, has been one of the stronger moves in the last six months. Obviously, given this move, the question: what's next?
I think despite the recent disappointing data coming from Chicago's purchasing managing index and the below expectation Challenger job's report, there has been some very positive economic news overseas that has been overlooked. The data in China is beginning to turn.
The S&P 500 has rallied nearly 30% while some market leading stocks like Apple (AAPL) are up even greater percentages this year. However, despite the strong rally in the S&P 500 and the Nasdaq, Asian equities have by far been the worst performing markets up to this point. Let's look at the chart.
As we can see, a basket of Chinese stocks have underperformed the broader U.S. indexes by nearly 25% since October.
The economic data coming from China has also similarly been disappointing during the past six months. As I've written in previous articles, China's real estate and construction sector have been in a bubble for the past year, and Chinese and other companies heavily levered to the Chinese construction and infrastructure sector have underperformed the market by a wide margin. China is most levered economy in the world to the eurozone, and its slowing GDP numbers reflecting lackluster exports have shown this.
So, what is this new economic data, and why is it so encouraging? If you listen to the fairly broad commentary by several Western companies that are heavily tied to Chinese retail spending, China's consumer spending has held up pretty strong. Companies like YUM brands (YUM), McDonald's (MCD), and Nike (NKE), have all reported strong numbers even while companies like Cliffs Natural Resources (CLF) and Walter Energy (WLT) continued to report lackluster Chinese demand for commodities like iron ore and mettalurgical coal.
The new and positive data that came from China was that several of China's largest real estate developers actually reported their second month of increasing apartment sells in China's major cities. China also recently reported a trade surplus that surprised most analysts.
Also, several dry bulk shipping companies are beginnign to positive comments. Just recently Morgan Stanley came out with a bullish new report on shipping rates following the recent positive comments some shipping companies like Cosamare that shipping rates are likely to recover this year. Alcoa's recent positive earnings report also suggests that the construction industry is beginning to recover at a faster than expected pace.
To conclude, while, like most major economies, is leveraged to the eurozone, the recovery of their construction markets seems likely to accelerate as the year goes on. Europe is important, but most U.S. companies are more leveraged to Asia than Europe today. The past is often a good predictor of the future, but past trends don't always mirror future results. With many shipping companies beginning to become bullish on China, despite the reduction in existing carriers, signs that China's construction industry is beginning to pick up are starting to increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
