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Worst Chinese Economic Indicator Ever: What's Next

Mar. 03, 2020 10:08 AM ETAAPL, ACN, ASML, ASMLF, GILD, GOOG, GOOGL, INTU, JNJ, ULTA16 Comments
Robbe Delaet profile picture
Robbe Delaet


  • The S&P500 dropped by +10% as fear for the impact of the Coronavirus on the economy intensifies. It is too early to estimate the impact on the US economy.
  • However, the recent horrible Chinese PMI read-out shows that the impact on the economy can't be underestimated. This reliable indicator was even worse than during the financial crisis.
  • The early development of worldwide Coronavirus cases look less bad compared to China. However, my graphs show that the worldwide trend of infected cases is growing exponentially.
  • If this trend continues its path, the worldwide economy could land in a recession. I advise investors to approach the market carefully by waiting out US economic indicators. Buying Gilead could hedge your portfolio significantly.

In the week of 24 to 28 February, the S&P500 (SP500) experienced its worst week since the 2008 financial crisis due to an increase in fear for the impact of the Coronavirus on the worldwide economy. In fact, the fear & greed index plunged from 95 (extreme greed) at the beginning of 2020 to 10 (extreme fear) last week. Many investors are shrugging off those fears by minimalizing its impact. They are arguing that the virus is less worse than the flu and call this drop a 'buying opportunity'. In the other camp, we have the more cautious investors who believe that the economic impact could be severe and in its worst case could lead to a worldwide recession. Over the last days, the ex-China situation has worsened significantly, but correctly estimating the impact on the US economy is way too early. However, on 02/28 China revealed its Purchase Managers Index ("PMI") for February, which is very informative to predict the impact of the virus on the worldwide economy. Astonishingly, the PMI came in at 35.7 which missed the expectations by a staggering 10.3 and was even worse than during the big financial crisis. In this article, I will discuss the importance of this PMI read-out for the world economy. Second, I will give my opinion about the best investment strategy for the coming months.

(Source: Tradingview.com)

China February 2020 PMI read-out: worst in history

The Chinese Purchase Managers Index or PMI is a composite of questionnaires to 700 Chinese industrial companies, which gives an indication about its economic activity. A value above 50 is seen as economic expansion, a value under 50 as contraction. The PMI is seen as a reliable indicator as it has an 85% correlation with GDP on a quarterly basis. Astonishingly, the February number came in at 35.7 vs an already bearish

This article was written by

Robbe Delaet profile picture
Voor Nederlandstalige beleggers - bezoek beleggersuniversity.com als je wil uitgroeien tot een succesvolle beleggerFounder of Insider Opportunities / A new way of investing (insiders+algos) with 43.6% annualized returns since 2010 / Made hundreds of investors successful and confident in this challenging market environment During my Master of Business Administration at the University of Ghent (Belgium), I got passionated by finance. When writing my master's thesis I got attracted by the under-appreciated power of the insider investment strategy.The theory is simple: by following insider (CEOs, CFOs, board members...) purchases, well-respected researchers have proven that you can outperform the market significantly. That's because this "smart money" knows better than anyone else when their stock is undervalued.But adopting it in your investment practices is not easy: there are 850 purchases reported by the SEC each month, off which only a small fraction is valuable to follow up. As I enjoy challenges, I decided to dedicate my life into building a strategy around this very promising theory.After years of empirical research, I discovered a revolutionary strategy based on insiders and algorithms which generated 47.2% annual returns since 2010 (3x the S&P 500). My IO Golden Value, Growth and Biotech algorithms pick out the winning insider purchases (on average 6 per month) based on fundamentals and valuations.I understood this unique strategy could be extremely valuable to investors like you, enhancing returns and strengthening one's confidence in the market. To start improving investors' wealth generation, I decided to find Insider Opportunities in 2020.Click here to discover Insider Opportunities 14 days for FREE.By joining our community, you'll have an edge compared to other investors to find undiscovered, undervalued stocks. You'll get exclusive access to our daily Insider at Breakfast articles, outperforming portfolios, weekly market updates, group chat with other investors, and much more.I'm always happy to talk with other like-minded investors and help them out. Don't hesitate to contact me any time!Yours sincerely, Robbe

Analyst’s Disclosure: I am/we are long GILD, ULTA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (16)

Excellent opportunity to buy into ACN. Market oscillators are screaming buy opportunity. Now it is a patients game. With the latest MC simulations revealing ACN support at $139. When the market resets the shut down, look for some fantastic low cost buy in shares.
Robbe Delaet profile picture
@tuscanasky you are right. Looking at ACN and MA now!
good thing we just have to import their junk to sustain whatever it is we're sustaining, the cloud I guess. the facade is covered by our petro dollar I suppose.
Curious, how many people in the US got the swine flu? How many died? How did the markets do? How did the media cover (or not cover) it? A tale of two pandemics treated completely differently. Gee, I wounded why?
Robbe Delaet profile picture
@JRS5 with all respect, but I do not understand people who are unhappy with the cautiousness about this disease. Should the government and media act like this is just normal business? If we do not take any preventive actions, this virus could kill hunderds of thousands of people.

Talking about the swine flu: it is very unlikely to pass from human to human. In contrast, the Coronavirus is very transmissible. That's why we should be cautious and well-informed. If we all would just live our normal life (like travelling etc.), this disease could perhaps even kill millions of people.

Now about the stock market. Don't you think that the Chinese PMI read-out is a bit worrying? It looks like the worldwide economy could fall into a recession. Would you rather want to be warned for this or get surprised once it happens?
Robbe: With all due respect, I don't understand people either. Your statement: "Talking about the swine flu: it is very unlikely to pass from human to human." Completely false, the swine flu was very contagious and according to CDC, there were approx. 60.8 million people infected just in the US. Nearly 15K people DIED just in the US. Do you not understand this? You want to compare this to the Coronavirus where we have had 10 deaths? Go back and look and see how the stock market did back in 2009 before, during, and after the swine flu pandemic. It didn't even flinch. Do you not find that the least bit odd? Do you not ask yourself why? Now go back and look at how the media reported on it and compare it to now. The media is claiming that this virus has a 2%-4% death rate. Completely false. The CDC or WHO doesn't even comment on the death rate as we don't really know what it is because 80% of people who get this coronavirus show no symptoms at all and do not even know they have it. So if you factor that 80% number (reported by CDC and WHO) into the number of "confirmed" cases versus the "confirmed" deaths, you actually come up with a death rate well below 1%, closer to the flu. But hey, lets not let those pesky facts get in the way of a good end of the world media story, right? My friend, if you do not understand that our "main stream" media in this country has an agenda, with all due respect, you are as naive as they come. That doesn't mean we should not be vigilant, but we don't need to be hysterical either.

Regarding China, no I am not worried about the supply Chain as this is a temporary disruption over there. Cases are already on the decline there and most CE production facilities are back up in running at at least 50% capacity. Yes, there will be a short term disruption to the supply chain. Is it dire? No Are the markets over reacting due to media hysterics? YES. We should not be as dependent on China as we are. Thankfully this President is the first to actually take action about this issue. Whatever your political beliefs, we should tip our cap to him for that.
dunnhaupt profile picture
Obviously the Chinese are giving us only limitited information from the civilian sector. It remains anyone's guess how their "One-Million-Man" army is affected. Ditto North Korea.
Robbe Delaet profile picture
@dunnhaupt agree that the Chinese numbers will not always be correct.
I'm very curious about the USA the coming weeks. When eventually more people get tested, how many will be infected?
For now, the exponential increase ex-China extends. We must keep an eye on these developments for sure.
i think this is an interesting article because of the new facts PMI and export numbers. greatly appreciate it. i sold half of all my positions two weeks ago and half yesterday. only flow traders for me. they benefit from high volatility and have p/e of only 7. great dutch company that with thrive when they come with trading update 21-4
Robbe Delaet profile picture
Thanks for the reaction @otto1234567890 ! I'm not in favor of selling all your stocks, because no-one can predict what the overall market will do. The virus might as well fade away and the market could potentially reach new highs, which would not be good for sellers. In contrast, I like to buy high-quality cash flow compounders which will be able to perform well during a recession.
I do like your Flow Traders pick, as it is a great hedge against a crash.
Good luck!
1/4 of numbers does not a trend make
kenski profile picture
It looks like the PMI bottomed out quickly and during the financial crisis, then shot back up over a 4 month period (to a level higher than it has been over the last 6-7 years)
Robbe Delaet profile picture
@kenski that's right. Probably, the biggest chunk coronavirus impact will be limited to several months as well. However, I do believe the market will react strongly if the US economy follows the Chinese trajectory. I believe it could pay off to be cautious until the real economic impact in the US is published.
Jack Harkness profile picture
I wonder how many of the purchasing managers in China reported their numbers from home.
Yet there is no better company than Apple
Robbe Delaet profile picture
@fredrik2109 purely based on quality, Apple is one of the greatest companies out there.
But paying more than 20x earnings for a company growing in the low single digits is just too much. The market needed a cooldown & I believe it could tank more given the horrible PMI numbers from China.
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