China Fears Send the Dow and S&P 500 to Worst Week Since 2011

The Dow Jones Industrial Average and the S&P 500 just suffered their worst week since November 2011. On Friday, the Dow fell 531 points, or three percent; it shed more than 1,000 points this week. Other markets around the world also got shellacked; the Shanghai Composite dropped 4.3 percent on Friday, while the DAX, in Germany, closed down nearly 3 percent. Commodity prices are tanking; oil prices hit their lowest levels since 2009, below $40 a barrel. Now, there are fears that America’s six-year bull market could be heading for a correction.

The culprit? Growing fears and evidence of an economic slowdown in China.

The string of bad economic news out of Beijing continued Friday. The latest concerns came from China’s manufacturing sector, which shrunk to its lowest levels since 2009 during the Great Recession. This all comes after China devalued its currency last week, as year-over-year exports decreased by 8.3 percent in July and concerns grow that Beijing won’t hit its 7 percent growth target for 2015.

Now, analysts are split over whether recent downward trends on global markets is a short-term scare or a larger sign of a global slowdown. For his part, Jim Chanos, an American hedge fund manager, who is president and founder of Kynikos Associates, said to brace for the worst.

“It’s worse than you think. Whatever you might think, it’s worse,” he told CNBC on Friday. As of March 2014, Kynikos Associates had about $4 billion in assets under management.

One indicator that suggest Chanos might be right are commodity prices. Countries around the world rely on China to buy oil and other raw materials. But weaker demand from Beijing, in part, has sent the price of commodities down sharply this year.

But to truly capture just how much commodity prices have fallen, it’s helpful to look at the last five years. As the chart shows, they’ve have been in a free fall since June 2014.

Nigel Green, CEO of deVere Group, a financial advisory firm that consults on more than $10 billion in assets, acknowledged there are many issues investors should be concerned about, especially coming out of China. But he said it’s too early to tell if the sky is falling.

“I believe that this volatility is likely to remain with us, at least until the end of the year. By then we will have a clearer view as to the risk of a China economic ‘hard landing,’” Green said in a research note circulated Friday.

Green added he thinks there may be good news on the horizon. He said the euro is undervalued, which makes European goods cheaper and should help eurozone economies to stabilize. He also anticipates that Federal Reserve chief Janet Yellen will delay a long-awaited interest rate rise that would make it more expensive to borrow from the federal government. Cheap oil — prices are at a six-year low — also should drive investment.

“But until this good news starts to challenge the current market nervousness, investors are advised to sit still and ensure their portfolios are well-diversified,” Green cautioned.

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