The market was greeted by good news this morning as the manufacturing index, as measured by the Institute of Supply Management, showed that manufacturing expanded. The index rose to 52.9 in August, a better than expected reading (anything above 50 represents expansion), marking the first time in 19 months that the U.S. manufacturing activity has expanded.
The reading for new orders spiked to 64.9, the highest since December 2004. The Fed’s easing and other policy measures, as well as the Federal government’s stimulus programs (including the “cash-for-clunkers” program and tax credits for first time homeowners) are being credited with having a big part in the improvement in demand. Companies’ need to restock after inventories fell at a record $159 billion annualized rate in the second quarter also contributed to the improvement.
So why did the market decline? Today’s report is no doubt encouraging, but after inventories are restocked, there’s no guarantee that there’ll be sufficient consumer demand to continue growth. And the government’s spending has its limits too.
In addition, as we mentioned before, at today’s valuations the market prices in a lot of good news. Any slowdown in news flow – or a small disappointment reported – is bound to dampen the market’s expectations. And this is what’s happening in China.
The Shanghai Composite Index, China’s domestic stock index which represents the performance of A-shares and B-shares listed on the Shanghai exchange, fell some 22 percent in the month of August. Indeed, the index rose 80 percent between January and July as investors flooded the market as the state-run government’s stimulus efforts paid quick dividends with China resuming rapid growth quickly. But worries that the market had gotten too far ahead of itself, concerns about growth being unsustainable and the potential for a new bubble stemming from the government’s loose monetary policy turned August into a bear market month.
China has been the lone bright spot in the dreary world economy, and its faltering could be disastrous for the rest of the world.
The decline in the U.S. market today is being led by a banks’ and insurance companies’ selloff. The industry is not getting better, not in any reasonable terms. In the second quarter of 2009, the Federal Deposit Insurance Corp. added 111 banks to its endangered list, increasing the total to 416, about 5 percent of the nation’s banks. As of June 2008, there were only 117. Banks on the list are deemed to be at a high risk of insolvency. So far this year, 81 banks have already shut down. The giant banks deemed “too large to fail” will have all the government backing they need, but that does not mean they are in great financial shape. Rather the opposite – why would they need government’s backing otherwise?
