How China Could Spark A Major Downturn For U.S. Stocks

Share This Article
May 17, 2017 8:27am NYSE:SPY


From Mike Burnick: Our E-Wave cycle forecast model has been steadfastly calling for a stock market correction, and perhaps a sharp one.

In fact, stocks are overdue for a pullback.

And now I’m seeing fundamental confirmation that a correction is dead ahead, and it’s from an unlikely indicator: China’s deleveraging.

Recently, I wrote about China’s runaway debt binge. And I told you how Beijing has reined in credit growth while it cracks down on China’s “shadow banking” system. Well it’s working, which is good for the long-run health of China’s economy, but bad for global stocks, as I’ll explain in just a minute.

First the facts. Shadow-banking assets in China surged 21% last year alone to the equivalent of $9.3 trillion, equal to 87% of China’s entire economy!

There’s no question such fast-paced growth in credit – much of it loosely regulated at best – represents a clear and present danger to China’s economy.

So about nine months ago, the authorities in Beijing correctly began cracking down on excess credit growth, by gradually raising short-term lending rates. And it’s paying off.

In April, total credit growth slowed to 14.4% year-over-year, down from 16.6% a year ago.

Although the Red Dragon’s economy has slowed a bit as a result, its growth still stirs envy in the rest of the world, clocking in at 6.9% last quarter, with retail sales “slowing” to 10.7% year-over-year and corporate-profit growth of “just” 24% in March!

But here’s why China’s credit slowdown spells trouble for global stocks …

As you can see in the chart above, credit growth in China has a very tight correlation with the health of global stocks. When China’s credit growth turns negative, stocks tend to struggle.

In the past, we’ve seen steep market corrections lining up perfectly with periods of negative credit growth in China … most notably in the 2008 bear market, again in 2011, and again in 2015. Well guess what?

China’s credit growth just turned negative again for the first time since early 2014. And the last time this happened, the Dow dropped 8.5% in mid-2014, then suffered back-to-back corrections of 16% and 14% in 2015 and early 2016!

So far, stocks have been defying gravity – as well as my own expectations for a correction – by notching new record highs recently, led mainly by the tech-heavy Nasdaq 100 Index.

The S&P 500 got in on the action this week by hitting a new record high above 2,400 for the first time. Even the small-cap Russell 2000 scaled a new peak.

But mark my words, this rally is running on fumes and a sharp correction could begin at any time. China’s credit growth turning negative could be just the catalyst to trigger this sell-off at long last.

The SPDR S&P 500 ETF Trust (NYSE:SPY) fell $1.21 (-0.50%) in premarket trading Wednesday. Year-to-date, SPY has gained 7.40%, versus a % rise in the benchmark S&P 500 index during the same period.

SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Large Cap Blend ETFs category.

I’m aiming to take advantage of this correction for Real Wealth Report subscribers with timely trade recommendations designed to profit when the stock market rolls over. For more details, click here.

This article is brought to you courtesy of Money And Markets.

Read Next

Get Free Updates

Join over 50,000 investors who get the latest news from!

Most Popular

From Our Partners

Explore More from

Free Daily Newsletter

Get daily ETF insights from our market experts. Never miss another important market development again! respects your privacy.

Best ETFs

We've rated and ranked nearly 2,000 ETFs and ETNs using our proprietary SMART Grade system.

View Top Rated ETFs

Best Categories

We've ranked dozens of ETF categories based on relative performance.

Best ETF Categories