China Under-Performance and The US Equity Market

JC Parets
August 4, 2018

From the desk of Tom Bruni @BruniCharting

Every so often we hear the narrative that under-performance from China's stock market is a canary in the coal mine for US Equities, and the recent tariff tantrums have brought this discussion front and center. Today I want to look at this relationship to see if it has any merit or if it's just a smart sounding soundbite that you can use around the office water cooler.

Below is a nearly a 40-year weekly line chart of the Shanghai Composite relative to the S&P 500. Typically the version of this chart accompanying the tariff talks is a year-to-date chart of the Shanghai's performance falling off a cliff relative to the S&P 500. When it's framed that way, it's very easy to create the illusion of a relationship between China's under-performance and the volatility we experienced in the US Stock Market.

Click on chart to enlarge view.

What expanding the timeframe of this chart does is show that this year's weakness is nothing more than an acceleration of a trend that's been in place for nearly a decade. China's performance relative to the US ebbs and flows, but at the end of the day it's really just in one giant range. As the correlation study at the bottom of the chart indicates, there's nothing that suggests the Shanghai Composite needs to be out-performing the S&P 500 for US Stocks to move higher on an absolute basis.

With the constant noise created by the markets it's tempting to draw connections between two seemingly related events, but since we're market participants and not journalists, it's important to make sure the data supports your conclusion before publishing or acting on it.

Anyone who thinks Chinese stocks under-performing US stocks is a new development, clearly hasn't been paying attention. If you're going to be bearish US Equities, you'll need to find a better reason than China.

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Thanks for reading and let us know if you have any questions!

Allstarcharts Team

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