U.S. Stocks Target Bigger Rally as China Risks Another Weak Quarter

Stocks, China, US

China's economy is sluggish, reflecting the lack of growth of businesses while US stocks are nearing all-time highs. | Source: Shutterstock

Following a spike in the U.S. stock market on September 25, there are hopes that U.S. stocks are in for a bigger rally as the economic growth of China is expected to slow down heading into early 2020.

In the past 24 hours, as seen in the performance of Dow Jones and its 162-point increase, the U.S. stock market has rebounded strongly from a dip caused by the impeachment inquiry submitted by the Democratic Party.

As China’s economic growth slows that may encourage both countries to work for a partial deal in the next round of meetings, U.S. stocks are anticipated to sustain its momentum in the short term.

Stocks in a good position to rally, stock market growing at a decent rate

According to a report by China Beige Book, the growth rate of the Chinese economy slowed down in almost every aspect in the past three months based on the performance of more than 3,000 businesses.

SSE Compisite, a major stock index in China which tracks all stocks in the Shanghai stock market, fell by 10 percent in the past six months
SSE Composite, a major stock index in China which tracks all stocks in the Shanghai stock market, fell by 10 percent in the past six months (source: Yahoo Finance)

“Nationally, revenue, profits, output, sales volumes, and job growth all slowed from a quarter ago, as did both domestic and export orders,” the report read.

Shehzad Qazi, China Beige Book managing director, noted:

“Borrowing is still high. This could offer some relief next quarter. Any fears of further labor market stress could result in Beijing pushing firms to staff up as credit is doled out. That said, any comparison (in economic growth) with very weak Q418 will look comparatively better than it should.”

Following reports of slowing growth, the SSE Composite, the main index of China that tracks all stocks in the Shanghai stock market, dropped by nearly one percent, down by more than ten percent in the past six months.

In contrast, the Dow Jones and the rest of the U.S. stock market remain in a similar position as six months ago, demonstrating upside momentum.

Why a market reaction is likely from a trade deal

Throughout 2019, analysts have generally stated that the progress of the trade talks between the U.S. and China have priced into the U.S. stock market.

However, as the two sides started to demonstrate willingness to come to an agreement in recent weeks, Harris Financial Group managing partner Jamie Cox said that investors are now more interest in a trade deal with China.

“Markets are way more interested in a trade deal with China. Now that Congress is deadlocked into impeachment, the president can close a deal with China to boost the global economy into 2020, just in time for ballots to be cast,” he said.

A partial deal with China by the end of October, with the Federal Reserve already having approved an interest rate cut and the market already recovering from the dip caused by the impeachment inquiry, is likely to extend the rally of the U.S. stock market until 2020.

Many strategists like Cresset Wealth Advisors CIO Jack Ablin have also started to dismiss the potential impact of the impeachment inquiry on the market, noting that investors are highly unlikely to take it seriously enough to have an effect on stocks.

Ablin explained:

“The Senate is just going to ignore it. It’s probably at worst a distraction. I really don’t think investors will take the risk of impeachment seriously at this point. If there’s really strong damning evidence, that’s a different matter.”

If the impeachment inquiry has no major impact on the stock market, there are no big roadblocks ahead that could trigger a sell-off of stocks in the short to medium term, growing appetite for a trade deal and more upside movement.

Last modified: September 23, 2020 1:03 PM
Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013. Reach him on Twitter or LinkedIn.
Previous Ninja Throws Major Shade at Twitch Just Days Before TwitchCon 2019 Next PlayStation's Death Stranding 'Goes Gold' Ahead of November Release