It’s a long-time coming, but Chinese stocks like Alibaba Group Holding Limited (NYSE:BABA) now directly affect U.S. market sentiment. Moreover, they could very well be the cause of a U.S. market crash in 2015.
At the very least, U.S.-listed stocks like Alibaba are a gauge on domestic speculative fervor, which, for foreign companies, is on the decline.
Of course, in the absence of corporate earnings reporting, the equity market looks for any trading catalysts it can muster. This is traditionally a tough time of year for stocks. Traders act emotionally on global economic news, geopolitical events, and commodity price action to a lesser extent.
The two big reasons why domestic equities have been so volatile of late are 1) the dramatic sell-off in Chinese equities—including stocks like Alibaba. and 2) the uncertainty surrounding the first U.S. interest rate hike in years.
Alibaba: The Perfect IPO—While It Lasted
Without question, Alibaba’s Chinese Internet business is still a growth story. But like so many IPOs, they come to market expensively priced and with overly high expectations.
Alibaba started out great on the stock market. But now, it has fallen into crash territory—down close to 50% from its 52-week high.
Alibaba’s share price action since listing is emblematic of an equity market that’s just plain tired out after years of price appreciation, new record highs, and momentous monetary stimulus.
I don’t see a U.S. market crash in 2015 without some major unforeseen shock to the system. It’s well proven that the Federal Reserve, which is still the great arbiter of global equity market sentiment, remains friendly to Wall Street and equities in general.
Below is Alibaba’s one-year stock chart.
Chart courtesy of www.StockCharts.com
There’s no doubt that China’s economy is slowing. But this isn’t really anything new. That country’s stock market just got ahead of the economy’s fundamentals.
Alibaba is a growing business. But it is a canary in the coalmine and a good indicator about speculative sentiment.
What the domestic market needs is corporate earnings reports. And while first-half growth was virtually nonexistent, corporate outlooks for 2016 will soon become the market’s new catalyst.
On the back of many years of capital gains and extremely low interest rates, we’ve been due for a down year in stocks for some time.
This remains a stock pickers market with no wind at your back from the broader market. There’s a decent chance that U.S. equities can rally later in the fourth quarter, even with the first rate increase. Monetary policy remains highly accommodative.
But it is possible that China’s domestic economy could be the catalyst for global recession. A good benchmark to keep on your radar is Alibaba shares.
This time of year can be perilous for stocks. And it’s pretty clear this market is cranky.
There’s going to be a time when select Chinese stocks will become very attractive given the country’s long-term growth prospects. But the current environment isn’t it.