PUTTING OCTOBER IN THE PAST: Declines in the U.S. stock market on Friday interrupted a very strong week. Friday’s pullback was a result of concerns about oil prices and global economic growth. The big rise took place after the U.S. election results. With a divided congress, anxiety about radical economic policy changes receded. Markets like certainty, and they showed it on Wednesday as the Dow Jones Industrial Index rose over 500 points and the S&P 500 rose over 2%. With the October drop in the rear view mirror, and continued earnings increases, stock valuations have been getting closer to normal, not elevated, ranges. The S&P 500 is now trading at about 16 times forward earnings. The average since 1986 is a bit over 15.
OIL PRICES DROPPING: On Friday, oil prices decreased for the tenth straight day, the longest such streak in 34 years. Oil prices are now nearly 22% lower than its 52-week high.
CHINA’S ECONOMIC TROUBLES: According to a new report by S&P Global, local governments in China have amassed hidden debts of between $5.5 and $6 billion. This is not bond debt, nor does it showing up on balance sheets anywhere. These debts are known as LGFVs, or local government financing vehicles, and they have been used to fuel infrastructure and other spending that has helped China fuel its growth. Another concerning statistic is that the amount of shares in the Chinese stock markets that have been collateralized, or used to secure debt, has quadrupled over two years to $898 billion as individuals continue to borrow more money. China’s GDP growth of 6.5% last quarter does not represent a major slowdown, but if it continues in the teeth of all this over leveraging and trade tensions with the U.S., China could face some trouble. The Shanghai Stock Exchange Composite Index is down 25% this year, and many of those investors who have taken out loans on the collateral of those shares will face margin calls. Another concern is that earlier this year China removed the two term limit for President Xi Jinping, allowing him to continue past 2023. This prompted many wealthy Chinese individuals to move their assets overseas.
U.K. GROWING: The U.K.’s economy expanded in the third quarter at an annual rate of 2.5% powered by consumer spending and a pickup in exports. This growth spurt puts it among the best performing economies in Europe in the third quarter. The Eurozone as a whole had its worst quarter since 2013, growing at an annual pace of 0.6%. The slowdown is largely attributed to less imports to cooling Asian economies and financial stress in Italy. Germany’s economy was flat in the third quarter.