September 9, 2023 Market Update

The U.S. equities market pulled back during the week of trading through Friday, September 8.  The S&P 500 Index’s moderate 1.3% decline marks its first weekly loss since mid-August.  The market is still up a strong 16.1% for the year to date and so the recent weakness in stocks over the past month may be nothing more than a healthy round of consolidation following a rally that was flirting with irrational exuberance.

The yield on the benchmark 10-year Note ticked up to 4.26% at the week’s close, near the highest level since the Federal Reserve started raising interest rates in early 2022, as the debate about whether the Fed’s tightening cycle has ended continues.  Market consensus is that the central bank will leave rates unchanged at the next monetary policy meeting on September 20.  

Beyond U.S. shores, markets are reassessing the world’s second-largest economy.  Not so long ago, many thought China’s ascension as the world’s primary growth driver was written in stone.  Now, doubts are beginning to spread.

At a get-together with his supporters last month, President Joe Biden compared China’s economy as a “ticking time bomb”.  While many of his other comments at the fund raiser were factually wrong, this analogy may prove to be correct.

“The conventional wisdom seems to be flipping from a concern with the unstoppable rise of Chinese power to a worry about the irrevocable decline of China’s economy and population,” says Richard Fontaine, chief executive of the Center for a New American Security in Washington.

A recent run of disappointing data suggests that the Chinese economy is at risk of missing its growth target of about 5% for 2023.  Bloomberg’s economists are forecasting growth will slow to 3.5% in 2030, dipping to near 1% by 2050.  

There are a number of reasons why China’s economy is struggling.  

• Topping the list is the immense issues facing China’s real estate sector, which accounts for 20% of the nation’s economy.  Housing sales plummeted after the Chinese government tightened credit to large developers and told banks to slow mortgage issuance, in an effort to make the economy less dependent on real estate.

• Rising unemployment, especially amongst younger Chinese is another immediate problem.  In July, the urban youth unemployment rate reached 21.3%, the highest ever recorded in the country, leading the National Bureau of Statistics of China to suspend future releases.

• Longer term, the decline in China’s population could lead to slower economic growth.   China saw its population decline last year for the first time since the 1960s.

As the Communist Party of China struggles to contain the fallout from the country’s economic woes, the U.S. and allies, as well as India, Vietnam, and other Southeast Asia nations, will undoubtedly try to exploit China’s vulnerability.  Whether or not they will be able to do so, and if so for how long, is yet to be determined.  

That’s all for now.  Have a great weekend, and invest wisely my friends.