U.S. investors jittery as Chinese stocks swoon

Brian J. O'Connor
Detroit News Finance Editor

Jitters over another bad day for Chinese stocks sent shares on U.S. markets down for the second day in a row Thursday, with all major indexes dropping by more than 2 percent.

U.S. investors are worried that the Chinese market’s volatility indicates greater weakness in the Chinese economy, which is a main driver of global growth and commerce. China also added to investor fears earlier this week when it devalued its currency.

Still, investment experts say U.S. investors should remain calm and that China’s market gyrations at this point are unlikely to do any ongoing damage to the U.S. markets or economy.

Fears of a slowdown in China have been growing for years, and the inscrutable nature of the government-managed economy and stock market leaves investors without reliably transparent information. That makes them that much more liable to get jumpy over any seemingly bad news there. While Chinese officials say the economy is growing at 7 percent, some analysts believe it’s more like 4 percent.

For the day, China’s Shanghai Index fell 7 percent; on Friday it got off to a 3 percent gain in early trading, but that was quickly turned into a slight loss. The Dow Jones industrial average dropped 2.3 percent on Thursday, the Standard & Poor’s 500 index lost 2.4 percent and the Nasdaq composite index declined 3 percent. Fears about low demand from a slowing Chinese economy sent the price of U.S. crude oil to 12-year lows, which in turn poses increased risks to financial stocks and bonds in the energy sector.

“We’ve been seeing this for two or three years,” said David Sowerby, senior portfolio manager for Loomis, Sayles & Co. L.P. investment management in Bloomfield Hills, who said he’s skeptical about China’s official numbers. Sowerby added that the correlation between Chinese and U.S. stocks is low, saying, “I would expect any lasting contagion from Chinese market weakness to the U.S. to be minimal.”

For the rest of the year, Sowerby said, he still expects U.S. stocks to gain between 6 percent and 7 percent.

Since the market’s close on New Year’s Eve, the Shanghai Composite Index is down 11.7 percent, while the S&P 500, the broader measure of U.S. stocks, is off 4.9 percent.

“It seems to me that the Chinese stock market is a complete different animal than the U.S. stock market. There’s much more volatility than we’re used to seeing over here,” said Nicholas Hopwood, a certified financial planner who runs Peak Wealth Management in Plymouth. “When you see these 7 percent gyrations it can be unnerving, but it’s a completely different culture when it comes to the U.S. market.”

Part of that difference influencing the Chinese gyrations comes from the government’s move to withdraw limits placed on stocks in June. That was during an epic crash that sent the Shanghai index plummeting by 32 percent in just a few weeks. To stem losses, the government halted initial public offerings, allowed half of the companies on the stock exchange to stop their shares from trading, gave margin investors increased options for collateral so they could avoid margin calls, and ordered large shareholders to stop selling for six months.

China also has devalued the yuan, which makes its currency cheaper but renders exports from the U.S. and other countries more expensive to Chinese buyers. China’s growing economy has also been a big buyer of commodities, construction equipment, technology and a growing market for U.S. carmakers, such as General Motors Co., which has had a hit in China with its Buick line.

Because of slow or no growth in Europe, Japan and many emerging markets, and the ongoing but weak economic recovery in the U.S., China has been left since the recession as the biggest driver of the global economy.

For U.S. investors, the advice is to take the long view, remember that economic fundamentals in this country remain strong, and to make sure their investments are allocated to diversify and manage risk.

“You can’t be taking too much risk in the first place,” Hopwood said Thursday. “If the China market goes down today it has nothing to do with what we think our companies are going to be worth in five years. If you can get around that, and get over the emotions, you’ll be OK.”

Investors also should look beyond what is less than one week of trading for the year.

“In the end it can be unsettling,” said Sowerby, “but I don’t think this will meaningfully alter the path of the markets over the next few years.”


Twitter: @BrianOCTweet