The US and China have the same problem – fixing their broken markets

By John Stepek

published 5 January 2016

in Features

150105-chinese-stockmarket — China's New Year market crash was echoed around the world

When you're following the markets on a daily basis, it's easy to get bogged down in the details.

Stocks go up, stocks go down. They obsess about this, they obsess about that it's easy to lose perspective.

But when you take a bit of time to reflect, you realise how quickly things can change.

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Less than a decade ago, no one could have cared less what happened to the mainland Chinese stockmarket. It was a backwater casino. It didn't matter.

Now well, it turns out that a bad start to the year for China is more than capable of giving everyone a New Year hangover

How China's mini-crash battered markets around the world

Will it continue? I don't set much store by indicators based on dates and the like, but it's always worth checking in with these things just in case. Apparently the first trading day bears no particular relation to the outcome for the year "first day gains or losses in US stocks since 1904 have matched the annual direction half of the time", reports Bloomberg again.

But the month of January has a better record the S&P 500's return in the first month of the year reflects the overall direction "72.4% of the time".

Of course, if US stocks have a bad year this year, it wouldn't come as a surprise. They've been overvalued for a long time, and according to Meb Faber's latest update on cyclically-adjusted price/earnings (Cape) ratios remain among the most overvalued markets in the world (up there with Denmark and Ireland, apparently).

And then there's the fact that the Federal Reserve is still the first major central bank to be raising interest rates, even if it is only tentatively.

It's somewhat ironic. Both China and the US are wrestling with very similar problems. As Reuters puts it, "Beijing is trying to orderly unwind a massive and unprecedented stockmarket rescue last summer, while pressing ahead with reforms to allow markets to have a greater say in determining the yuan's value".

In other words, both the US and China are having to deal with the consequences of massive previous interventions designed to prevent markets from doing their job finding a price that everyone is willing to do business at.

The problem is that if you've kept a market propped up mainly on the promise that you'll intervene if things go wrong, then how can you ever expect the market to return to "normal" without at least some people getting hurt in the process? If it's all built on false confidence, then you have to expect some sort of consequence when you attempt to whip that confidence away.

Things have perked up a bit this morning. China's CSI 300 clawed its way to a gain of 0.3%, after hintsthat a ban on selling stocks by major shareholders would remain in place beyond this week.

But I imagine we'll see a lot more havoc in the weeks and months to come in particular, this trick of slowly weakening the yuan without scaring the horses too much will be very tricky to pull off.

This is why you have gold in your portfolio

Gold had a difficult 2015, ending the year down 10.4% (in dollar terms at least). The boom days of the last decade are well and truly over.

And as a result, it has lost a lot of popularity according to the FT, holdings in gold exchange-traded products fell to less than 1,465 tonnes last year, "close to the lowest level in more than six years".

However, that's reassuring no hint of goldbug mania there. And the point of having gold in your portfolio is to have something to offset all the big financial and geopolitical risks out there. You don't stick 100% of your money in gold 5%-10% is enough. If things go pear-shaped, you'll be glad you have it. And if they don't well, that's good too.

If you're looking for a gold play that's about making money rather than a form of financial insurance, you'd be better with gold miners this year. Ed Chancellor looked at why now is the time to buy in a recent issue of MoneyWeek magazine you can read more here.

If you're not already a subscriber, there's no time like the present to get your investing life in order sign up now for our special New Year package.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.