What China’s Economic Slowdown Means for the S&P 500

What China’s Economic Slowdown Means for the S&P 500In 2012, the Chinese economy grew at the slowest pace in 13 years. This year the country is expected to grow only 7.5%. (Source: Reuters, June 9, 2013.) Sadly, I believe this growth projection is still too optimistic a prediction.

The second-biggest economy in the world is sending out warning signals, but no one seems to care.

Statistics clearly show the Chinese economy is witnessing an economic slowdown. I warn you that its implications will be massive for the global economy and the U.S. economy.

Last month, exports from the Chinese economy increased only one percent from a year ago, while economists were predicting an increase of seven percent—very disappointing for the Chinese economy. (Source: New York Times, June 8, 2013.)

Adding to the misery, it wasn’t too long ago when the credit rating of the Chinese economy was downgraded by Fitch Rating Services from AA- to A+ (investment grade with some risk). At the time, Fitch said that the Chinese economy had “underlying structural weaknesses.” Credit in the country has reached 198% of gross domestic product (GDP). Back in 2008, it stood at 125%. (Source: “Fitch Downgrades China’s Credit Rating,” Financial Times, April 9, 2013.)

Bringing all of this into perspective, if the economic slowdown in the Chinese economy persists, we will see commodities prices decline further, because Chinese companies are such big consumers of commodities. For example, copper prices are already down more than 10% since the beginning of the year. As a result, companies in the basic material, industrial, and energy sectors will see their profitability decline.

It’s common sense: if an industrial metal company is able to take copper out of the ground for $3.00 per pound, and sells it for $3.60, then it will be able to reap rewards of more than 20%. But if copper prices go down to $3.30 (or about 10%), the company’s profitability declines by half!

Combined, companies in the energy, industrial, and material sectors make up little more than 24% of the S&P 500. (Source: Standard and Poor’s web site, last accessed June 10, 2013.) The economic slowdown in the Chinese economy can make one-quarter of the S&P 500 companies vulnerable, impacting the stock market.

As it stands, stock market euphoria is rampant—the key stock indices are moving ahead of reality. But the panic will strike once again, and the wealth of those who are extensively buying stock today will suffer. Be careful, dear reader. The economic slowdown in the Chinese economy will eventually take its toll on many American multinational companies and their stock prices.