Well it wasn’t a crash. But yesterday’s 6.8% decline on China’s CSI 300 index may signal a cyclical passing of the baton for global markets, at least for a few months. By this we mean that global focus could turn, for a spell, back to the U.S. market and U.S. stocks and bonds, which, relatively speaking, have lagged the global melt up. “Sell in May and buy USA!,” we say.
A rally in the US dollar and an increase in M&A activity in US stocks could be the fuel for higher highs on the S&P and Dow going into the summer. The US dollar index is as low as it’s been since late 2004 and looks set for a bit of a rally. And there’s still a bit of a “come home to momma” feel about global markets. When investors get spooked, their financial muscle memory prompts them to buy US Treasuries.
Practically speaking, it’s a fatal instinct. Who really wants to own the unbacked liability of a bankrupt government whose central bank’s official policy is to destroy the purchasing power of its currency? Show of hands please…
But with anaemic housing data in the States suggesting the Federal Reserve may cut rates this summer, stocks and US Treasuries have the all clear to rally past May, an unusual but not prohibited behaviour.
Incidentally, it might be useful to take an evolutionary perspective on this back and forth between Asian and American markets. Investors have been rewarded for buying U.S. assets for the last twenty years. It’s become a habit. But now, it’s a potential liability. So how will the habit be broken?
Well, for some investors, it won’t. They’ll fail to adapt to the new conditions in the global marketplace. And they will become extinct, or in financial terms, suffer losses. Their past behaviour will be poorly adapted to the new financial conditions.
Evolution rewards those mutations in a species that give it a “selective advantage.” Any trait, characteristic or behavoiur that improves your odds of surviving and multiplying gives you a “selective advantage.” This doesn’t seamlessly compare to financial markets, but you see our point…we hope.
The brief migration of capital flows back to the U.S. markets-if it happens-should not be taken as a sign that the U.S. is going to be the global engine of growth for years to come. The big growth is elsewhere, and if emerging markets sell-off a bit as money flows back to the States, we might even find some value.
Of course we could be wrong. A seven percent decline is just a few weeks’ work for the Chinese market. With 100 million traders, the market cap of Chinese stocks is likely to grow from its current US$2.4 trillion. It’s a great transfer from savings to stocks and we haven’t seen the last of it. But these secular trends ebb and flow. And right now, in scientific terms, it feels like US assets are about to get a big bid.
Markets and Money