It was just recently that the Nasdaq set a series of new all-time highs, fueled by strong earnings expectations for leading high-profile tech companies like the FAANG stocks — Facebook (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), Apple (Nasdaq: AAPL), (Netflix (Nasdaq: NFLX) and Alphabet/Google (NASDAQ: GOOG).
However, in the last week, big disappointments from the likes of Facebook, Twitter (NYSE: TWTR), Intel (Nasdaq: INTC) and PayPal Holdings (Nasdaq: PYPL) caused the Nasdaq shed over 300 points in the span of just three days. Thankfully, the hemorrhaging in the tech-rich index abated after strong earnings from Apple, which just became the first company to officially reach a $1 trillion market capitalization.
Apple’s strength is causing some renewed market optimism, and this optimism has spilled over into other big-cap tech stocks that were summarily hit with last week’s sector sell-off. Trusted names in the sector have all recouped a good portion of their short-term declines.
Unfortunately, the high-tech blow off shows how vulnerable investor sentiment can be when all the earnings stars don’t line up just right. I expect that volatility will remain elevated for the tech space during August.
In other news, the trade rhetoric with China has heated up even further, as President Trump has threatened to raise the tariffs on $200 billion of Chinese imports to 25% from 10%. So far, markets have not reacted and have done a good job of digesting the dialogue. In fact, the U.S. stock market trades with an undertone of confidence that a full-blown trade war will not break out as threatened. Conversely, China’s Shanghai Composite Index (shown below) continues to tank, taking that key market average back down to test its 52-week low.
Chart courtesy of StockCharts.com.
Clearly, investor sentiment in China is considerably more worried about the implications of tariffs on their export-driven economy. This trade war is coming at a time when leaders in Beijing are challenged to keep gross domestic product (GDP) on its current 6.5% growth rate. From the way the Chinese market is trading, I don’t think it would surprise many global market analysts if they found that China was cuffing their data to where the actual number is well below that government’s official GDP report.
China’s total debt, now exceeding 250% of GDP, dwarfs the U.S. debt at about 100% of our GDP. Any downturn in growth could precipitate a debt crisis. Thus, China has every incentive to lie. According to U.S. Census estimates, China’s population is set to begin shrinking as soon as 2026, which will drag economic growth rates down as well.
Assuming the present course of the country holds, it’s possible that the 21st century won’t be dubbed the “China Century” after all. In any event, “fake news” is nothing new to the Chinese government, and it will be interesting to see how long China will keep its poker face on over trade.
In early August as earnings season winds down, foreign markets are trading under pressure. There are fewer market participants trading, so investors need to put in some overtime in their stock selection. Apple’s move to new highs can’t do the heavy lifting for the whole market, even if it is the largest weighting in all the indexes and most exchange-traded funds (ETFs). Also, the news surrounding the trade war is only going to intensify leading up to the next round of tariffs that are set to go into effect in early September.
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