Dollars and Sense: China's yanking the stock market's chain

I think I can. The stock market seemed poised for a rebound, but never quite bounced this week. I kept thinking about the children’s book, The Little Steam Engine. The little locomotive kept saying to itself, “I think I can, I think I can.” To be fair, the Dow is up about 600 points since Feb. 3, the low point in the correction, and it was setting one new record high after another during the last half of December. If the market is taking a breather, it’s earned it.

Mixed news. Even so, the news this week was mixed, almost schizophrenically so. For example, though the U.S. markets were closed on Monday, global stocks that day rose significantly, largely because we got a report saying bank lending in China had increased. But by Thursday, global stocks fell significantly. Can you guess why? Again, China—this time weaker than expected Chinese manufacturing data. And the drops on Thursday were not small. Hong Kong’s Hang Seng index fell 1.1 percent at 22,415.40 and Japan’s Nikkei 225 shed 2.2 percent. European shares also declined. Germany’s DAX index fell 1.3 percent.

China’s importance. So why all the emphasis on China? The answer is that while the United States is the world’s largest economy, China has been the largest contributor to global economic growth. The United States will grow at about 3 percent this year. The latest Commerce Department projection is 3.2 percent. Of course, that’s a projection. It might be slightly less or slightly more. But I can say with virtual certainty that U.S. growth won’t be 1 percent or zero percent. China, though, has become hard to predict. It’s been growing at about 8 percent or more in recent years. But that number could easily end up being just 6 percent by year end. So when we see a number that shows China’s manufacturing sector not growing at all, that causes real jitters among those who need China’s manufacturing to keep growing, almost the entire world.

Eurozone. The economy of the 17-nation eurozone grew 0.3 percent in the fourth quarter. That’s pretty anemic growth by most standards, but it was above expectations for just 0.2 percent growth. It was an indication that the recovery is taking hold in Europe both in larger economies such as Germany as well as weaker ones, including previously troubled Italy.

Blame the weather. Mark Twain once said, “Everybody always talks about the weather, but no one ever does anything about it.” But it’s not often that you hear economists talking about the weather as much as they have been this week. Last week, I was in California and the drought there was all the news. This week, it’s the snow. A gauge of manufacturing in the New York region, the so-called Empire State manufacturing index, came in lower than expected. Weather got the blame for the slowdown. Construction on new U.S. homes tumbled 16 percent in January, according to the Commerce Department. Once again, bad weather in January likely played a role in the decline.

The Week Ahead. We won’t get any blockbuster reports during the week ahead, but we do get a number of reports that—if they all trend in the same direction—could set the tone for the markets for the next month. On Thursday, we’ll get the government’s second estimate for fourth quarter Gross Domestic Product. Right now, as I said earlier, that number stands at 3.2 percent. On Monday, we get the Conference Board’s Consumer Confidence number. Consumer confidence has generally been trending upward for a year or more, but it’s shown some fits and starts. If this month’s number is near or above the current number of 80.7, the markets likely will see that as a sign that Main Street sees the economy moving in the right direction. That’s likely to have an impact on Wall Street, too.