Markets Fell Hard…But Look at the Bright Side

by Richard Band | March 14, 2014 9:58 am

It could have been worse—much worse.  Stocks tumbled Thursday, with the Dow giving up 231 points and other headline indexes shedding similar percentages.  All in all, though, the selling was orderly and well contained—a hint that it will take more than F-16 fighter jets landing in Poland to knock the wind out of Wall Street’s bull.

In the day’s economic news, perhaps the most encouraging tidbit was the drop in first-time unemployment claims to 315,000 for the week ended March 8.  (That’s the lowest figure since November.)  As long as jobless claims remain at a gentle simmer, the U.S. business expansion will push onward, though probably not at the pace some of the more exuberant bulls are hoping for in 2014.

What’s the main risk, then?  A potential hard landing in China ranks at the top of my list.  Many of the economic numbers coming out of Beijing are suspect, but the steep decline in copper prices over the past two weeks (see chart[1]) suggests that the Chinese economy may be slowing more abruptly than official statistics let on.  China is by far the world’s largest copper user, accounting for almost 40% of global consumption last year.

At the very least, the plunge in copper has probably ruined a bunch of Chinese speculators.  (Reportedly, quite a few Chinese wheeler-dealers have financed real estate purchases by using copper as collateral for bank loans.)

However, even if the copper turmoil signals deeper problems inside the Chinese financial system, I don’t think China is headed for a recession by western standards.

For one thing, the Chinese government has ample resources to prevent a financial shakeout from turning into an economic bust.  With $3.8 trillion in foreign-exchange reserves, China doesn’t have to worry about servicing its external debts.  There’s still plenty of money for bailouts, if necessary.

Moreover, it’s worth remembering that China and other “emerging” countries have been working through a prolonged adjustment to feeble growth in the developed world.  That adaptive process is well underway, having started in earnest three years ago when the European sovereign-debt crisis hit.

Thus, I think it’s too late to sell out of emerging markets (stocks as well as bonds).  While some further weakness is certainly possible over the next few months, we’re probably a lot closer to the end of the troubles than the beginning.

Nor do I expect China’s issues (or the standoff in Ukraine) to do lasting damage to the U.S. economy and stock market.  Yes, worrisome developments overseas could rock our financial markets from time to time, and may even help trigger the equity “correction” I’ve been calling for in the middle months of 2014.

As with the two Gulf crises (1990 and 2002), however, I’m confident that any geopolitical shocks will prove, in the end, to be a buying opportunity for value-minded investors.

For now, I advise you to go slow with your new purchases, steering most of your cash into low-volatility, dividend-rich stocks like Baxter International (BAX[2]), Coca-Cola (KO[3]) and ConAgra (CAG[4]) and Verizon (VZ[5]).

From today’s levels, I’m projecting double-digit returns for all four stocks in the year ahead, even if the broader market struggles, for a while, to make further progress.

  1. chart:
  2. BAX:
  3. KO:
  4. CAG:
  5. VZ:

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