Jason's World

Once ebullient, the markets now see themselves besieged from all fronts by the Fed as well as global macroeconomic conditions.

Markets logged their third weekly loss in a row as continued strength in the economy (the latest Atlanta Fed GDPNow forecast was for Q3 GDP to grow at 5.8%) as well as heightened Treasury rates, likely as a result of Fitch’s downgrade of U.S. Treasurys. Even as the 10-year Treasury rate reached a 5-year high of 4.25%, it is well below the federal funds target rate, suggesting more room for the 10-year rate to grow. Currently, the S&P is at an 8-week low and the Nasdaq is at a 10-week low; this reflects the disproportionate impact of interest rates on tech stocks.

I largely talked about domestic factors putting pressure on stock markets in my past columns; however there are foreign factors that might cause waves as well. 

Fears are growing of a slowdown in the world’s second largest economy, China, as it sees a big drop in exports and one of its largest property developers beginning to miss bond payments. And the most recent GDP report came in far below expectations, with a year-on-year growth rate of 6.3% compared to the expectation for 7.3% year-on-year growth. The underwhelming growth is especially bad when you consider the fact that most other economies had a large jump in growth coming out of lockdowns-for example, Great Britain grew at 7.5% in 2021, when lockdowns were gradually eased, even though it’s growing extremely sluggishly now. 

This is set to have an outsized impact on the US because of China’s position as the world’s largest consumer market. Many of the nation’s biggest companies draw substantial amounts of revenue from China. Apple, for example, draws between 15% and 25% of revenue from China, depending on quarter.

Even as US politicians talk about decoupling from China, it is very unlikely that full decoupling can be achieved due mainly to the large Chinese consumer market. While you can onshore manufacturing, try onshoring the 900 million Chinese consumer class. I mean, sure, you can say that India has bigger potential, but it would take at least two decades for India’s consumer class to match China’s.

As the war in Ukraine rages on, the situation in Europe isn’t pretty as well. With a €8.6 trillion ($9.36 trillion) consumer market, it is the largest consumer market in terms of dollar size, larger than China. It has continued to lag in GDP growth, with much higher inflation than in the US. 

But the biggest wildcard yet to be revealed is the upcoming earnings of Nvidia next week-as the company that carried the entire stock market on its back for the past three months, the world will be watching whether the original AI hype company has truly lived up to its reputation. As with other value stocks, they cannot even give a hint of disappointment-we’ve seen what happened with Tesla in July.