Major indexes moved lower this week on concerns about global growth. For much of the year we have been warning about the risk of a slowdown in China. The slowdown there is pronounced and it has been steadily getting worse all year. True to form, even though the U.S. economy remains in good shape, investors ignored the growing problems overseas and now making a belated reassessment of risk across all asset classes, regardless if they deserve it or not.
The areas most at risk from China’s slowdown bore the brunt of selling over recent weeks. Lower demand for commodities impacts markets from Australia to Brazil, while emerging markets and China’s economy are closely linked. It doesn’t help that both Japan and Europe’s economies remain stagnant, either in recession or on the edge of one.
On the bright side, the selling appears to be nearly finished, with many sectors and indexes oversold. Commodities have been among the hardest hit, with some subsectors down 30 percent or more since July, with the bulk of the losses coming since September. Energy has been among the worst performing assets over the past two months.
The German DAX Index broke its major support line on Friday, something it had held all year. The CAC 40 in France and the FTSE in the UK were also trading at new lows during Friday’s session. In total, the picture overseas is far worse than it is domestically. Large cap U.S. stocks remain in a long-term uptrend, while foreign markets toy with potential bear markets.
The Russell 2000 Index broke to new lows for the year as investors continue to favor large caps. It remains the one main point of weakness domestically, with the index back to levels seen one year ago. In contrast, the S&P 500 Index is trading at levels seen in June. Large cap stocks are the vast majority of market capitalization and until the domestic large cap indexes crack, odds are stocks will see a rebound over the coming weeks.