The Immanent Correction In US Stocks And When Will China’s Stock Market Rebound?

The chart below shows the 6-month performance of the SPY (State Street S&P 500 ETF) and MCHI (iShares ETF that tracks large- and mid-cap stocks in China).

Six-month performance, SPY (S&P 500 ETF) vs. MCHI (China large- and mid-cap ETF). Chart by Tradingview.com.

These indexes are comparable, representing mainly large and mid-cap stocks in the world’s two largest stock markets. Over the past 6 months Chinese stocks have underperformed the S&P 500 by 38%, which is a staggering divergence. I believe this is largely caused by China’s short-sighted political crackdowns on various entrepreneurial ventures (from fining Jack Ma $4 billion to, more recently, declaring various lines of business (such as “private education” tutoring companies) to be illegal, which instantly incinerated billions of dollars worth of stock).

President Xi’s hardline anti-capitalist stance is likely to soften at some point (more on this below). And, as we know, markets eventually rotate out of one theme and into another, and the best time to pounce on these rotations is when the market switches from bear to bull conditions — the best gains come at the beginning of a cycle. First prediction (made with high conviction): the S&P 500 will suffer a correction (probably not a bear), and recent market activity indicates this may have already begun. If not, it is close to inevitable that we’ll see a sharp correction no later than the semi-predictable Sept/Oct slump (those are the two worst months for stocks historically).

I am basing my market correction call on more than seasonality, however. Based on recent headlines, I am firmly convinced that the more-transmissible Delta variant strain of COVID is going to sweep through the US this fall and cause another economic disruption. It won’t be as bad as 2020, but it will definitely slow growth and raise unemployment. Moreover, the market will do its usual good job of looking forward and anticipating this. The real economic damage will be evident by December, but the market should “get the memo” by September/October, November at the latest. With half the country still unvaccinated, and the major unvaccinated states like Missouri and Florida already in mini-COVID crises, I believe this to be close to a foregone conclusion.

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Terrence Howard 4 weeks ago Member's comment

Thanks for the share. Very interesting.
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