“It’s like deja vu all over again” – Yogi Berra
With China letting the yuan slide and the U.S. labeling the country as a currency manipulator, it reminded me of something I’ve seen before. And not that long ago.
In my last post on this, I noted how similar this market felt to the 2015/2016 market. To briefly recap what I noted in that post:
- Oil has tanked: Oil was $75 / bbl in last October and now is ~$54 / bbl today. That is nearly a 30% decline. It is also down ~8.5% in just the last five days.
- Earnings have been lackluster: While 76% of companies have beaten consensus estimates, they have been a number of earnings revisions lower and pre-released numbers that have guided down expected numbers. The blended earnings decline for the S&P so far has been -1%. If the rest of the market ends up being down, this will be the first time we’ve had 2 consecutive earnings declines since Q1’16 and Q2’16
- People are concerned about China: This time it is a little different, but what hasn’t changed is that China is a black box and people are concerned this time that the tariffs are negatively impacting the economy there.
- Interest rates plunged: Due to market concern and fear, the 10 year treasury hit 1.6% in early 2016. It is now at 1.7% after being at ~2.5% for the rest of the year. Notably, the S&P dividend yield also exceeds the treasury yield like it did back then.
Now, a new deja vu candidate has emerged. On Monday, China allowed its currency to dip to levels not seen in over a decade. But wait… Can anyone name when this headline came out?
The S&P declined 4% this day… So when did it come out? This news came out almost exactly 4 years ago in August 2015. Please read each of these articles and note how similar they sound to today:
- Wall St. posts worst day in four years, S&P 500 now in correction
- Stocks tank after China devalues currency
- Global shares nosedive on China economic woes
The interesting thing about the devaluation concern now is that it is much less than the devaluation that occurred back then. It also continued to devalue against the US dollar throughout 2016, but people seemed less concerned:
Should we prepare for a further sell-off? Or does last time teach us that this news was overblown? Did we narrowly skate by last time and this time is the real signal?
I tend to think that the market is most concerned about uncertainty, which causes this perpetual fear with China. It is a persistent unknown. Does it surprise me that a dominate export country is devaluing its currency (that was long pegged against the dollar) to entice more exports? No. Especially in light of the tariffs.
I think China clearly must be facing some pain, but the fact of the matter is that the US earns very little revenue from Chinese sales. We import from them, we don’t sell that much to them (in the context of earnings in the S&P, that is). I think further concern on China can and will eventually cause a real market correction, but I’ll likely be buying that dip based on US earnings likely being relatively resilient in that situation (outside of commodities, which could get crushed from lower infrastructure building in China).