Lucky Numbers

Just over three months ago a downturn in the Chinese stock market spread around the globe within hours, knocking U.S. stocks back on their heels. It took about seven weeks for the benchmarks to recover. So when the same Chinese market plunged almost 8% today, more than a few traders were nervous about a similar reaction. Their fears were apparently unfounded. The U.S. market opened with only minor losses which were easily recovered, and the day ended with small gains and another new record for both the Dow and the S&P 500. Even China-focused ETFs held mostly steady. PowerShares Golden Dragon China Portfolio (PGJ), for example, was almost back to break-even by the close of trading. Some closely related markets were actually up; iShares MSCI Singapore (EWS), which we hold in the ETF Portfolio, gained +0.9% today.

It seems hard to believe that just three months ago China was the linchpin of the global economy and it is now a mere footnote. Was the late-February meltdown an over-reaction, or was today an under-reaction? Clearly the Chinese market is overextended. Speculative fever is running wild among newly-affluent Chinese citizens. On the other hand, history shows that financial bubbles can get far bigger than most people think is possible. With China there is the additional complicating factor of government with near-total economic authority and a willingness to use it in pursuit of national policies. This makes the Chinese market exceedingly difficult to forecast.

Crude oil prices have climbed back above $66, and futures today reached their highest intraday point since April. This sparked additional gains in the energy sector but the risk of a reversal is still very high, in our view. The technology sector is starting to pick up momentum, especially the telecommunications and wireless groups. Utilities are holding steady and we are watching closely to see if the next move will be up or down. For today, we will keep all our model portfolios unchanged.