Stock market declines may not be a ‘complete negative’ for U.S. consumers

by The City Wire staff ([email protected]) 234 views 

While it is uncertain how the past few days of headline-grabbing declines in U.S. and global equity markets will impact Arkansas’ economy, the global economic conditions fueling the equity market stumble have the potential to negatively pressure share price growth for Arkansas-based companies, especially those involved in retail, energy and transports.

According to market watchers interviewed by The City Wire and Talk Business & Politics, the markets are primarily reacting to serious concerns about Chinese economic health. The country, which was nearing 50% of global GDP growth, is seeing significant problems in its real estate and equity markets. Some analysts have said the country’s real estate bubble makes the 2007-2008 U.S. housing market bubble look like a rounding error.

Those concerns were driven to the forefront when Chinese officials devalued the yuan in a move to help prop up the struggling economy. A devalued yuan makes Chinese exports cheaper and provides incentive for companies to manufacture goods for the Chinese market in China.

Amadou Sy, a senior fellow with the Brookings Institute, recently wrote about how the yuan move would impact Africa. His point was that the value of the yuan is less of a concern than a weak Chinese economy and slower spending among Chinese consumers.

“The turbulence in global markets following the devaluation has been mostly driven by market participants’ concerns over a stronger-than-anticipated slowdown of the Chinese economy. China’s GDP official growth rate has dropped to 7 percent from a double-digit average in 2010, and there are questions whether it is on a downward trend,” Sy noted.

The “downward trend” concern is weighing heavy on U.S. equity markets, but the threats are not as real as they were in 2007-2008 when several big U.S. banks collapsed. For example, the Dow Jones Industrial Average (DJIA) closed Monday at 15,871,28, down 3.58%. However, the index is almost 6% higher than in August 2013, and more than 56% higher than five years ago.

The S&P 500 closed Monday at 1,893.21, down almost 4%. Again, that broad index is up almost 16% compared to August 2013 and up almost 80% compared to August 2010.

That being said, several market watchers said equity returns could be muted for the next several years, with one analyst suggesting investments may be “stuck in low gear” for the next five years. However, one financial analyst said the market decline is not unusual and long-term investors should expect a number of downturns over the course of a value stock’s life cycle.

“When stock prices begin falling dramatically, it can appear that your only option is to sell in order to limit losses,” Edward Jones Investment Strategist Kate Warne wrote in a note to investors on Monday. “We disagree. If you are a long-term investor, the difference between success and failure may be determined by your actions during a stock market decline.”

Warne wrote “the next time the market has a hiccup, take a deep breath” and remember that market declines are normal, frequent and not a reason to sell good investments. She said such recurring events also begin and end without warning, providing an opportunity to buy quality investments at a lower price.

“Market declines can test the nerves of even the most patient investors. If you own a diversified mix of quality investments, resist the temptation to sell or make changes based on short-term events,” said the Edward Jones investment adviser.

Jeff Collins, an economist for The City Wire and former director of the Center for Business and Economic Research at the University of Arkansas, said the market declines and Chinese economy aren’t necessarily bad things for the average Arkansas consumer.

“To the extent that there has been a lot of volatility in the markets, I think people are taking it with a grain of salt. There has been a big (equity market) run up, so I suppose some retrenchment isn’t the end of the world,” Collins said, adding that the people who could get hurt in the short term are those who recently retired and depend on investment income.

Two positive impacts, Collins said, are cheaper Chinese-made goods for U.S. consumers – and just in time for the holiday shopping season – and the probability of lower fuel and other energy prices for the remainder of 2015.

“I hear the concern. I get it. The Chinese economy is not great right now. But is that bad? Yes and no. It cuts both ways. It’s not a complete negative,” Collins said. “Also, it’s (equity decline) just a short term effect. If it were to go down and stay down, then we’ll have more reason for concern.”

The biggest decliners at the Monday close were among Arkansas companies with a global presence. El Dorado-based Murphy Oil Corp. (NYSE: MUR) shares were down 5.6%, Bentonville-based Wal-Mart Stores (NYSE: WMT) fell 3.89%, and Springdale-based Tyson Foods (NYSE: TSN) fell 3.6%.

Wal-Mart could benefit in that goods out of China will be cheaper, but the global retailer also has a retail presence in China and those operations will suffer if the Chinese economy falters further and consumer spending is reduced.

Arkansas’ transport stock were also hit. Lowell-based J.B. Hunt Transport (NASDAQ: JBHT) closed the day at $74.78, down 1.84%, and Fort Smith-based ArcBest (NASDAQ: ARCB) closed at $28.37, down 3.73%.

The financial services sector also took a beating on Monday. Home BancShares (NASDAQ: HOMB), the parent company of Centennial Bank closed the day at $37.02, down 5.63%. Pine Bluff-based Simmons First (NASDAQ: SFNC) closed at $42.79, down 3.89%, and Little Rock-based Bank of the Ozarks (NASDAQ: OZRK) closed Monday at $39.34, down 3.37%.

On the New York Mercantile Exchange, West Texas Intermediate closed at $38.24 a barrel, down $2.21 or 5.5%. That closing price is the first time that the U.S. benchmark crude has settled below $40 a barrel, according to the U.S. Energy Information Administration.

On international markets, Brent crude fell $2.77, or 6.1%, to $42.69 a barrel, on London’s ICE Futures exchange. That is the first time that the international benchmark has dropped below $43 since March 2009. It is now trading nearly 59% below its one-year high of $103.19 reached in August last year.