China’s stock market rout gets the blame for the worst start ever of a new year for the S&P 500. Of course, a stock sell-off that erases almost $1 trillion of investors’ money has many causes, but none is simpler than the fact that more people are looking to sell than buy. .
Pessimism spreads faster than hopefulness. Emotions run fast and hot while rationality is calm and cool. Investing is no different. The Shanghai Composite Stock Index drop of more than 10 percent in just a few days last week is breathtaking, no doubt. The losses are real. And painful. However, long-term investors will be able to assess the Chinese troubles with more clarity in the week ahead.
Economic data out of China can be suspect. The Central Government continues intervening in its stock and currency markets. So one of the best places to get a gauge on the trouble in China will be inside the financial results of American companies doing business there. Companies begin reporting fourth quarter results in the week ahead. The threat of China’s troubles will be larger than the business risk for most companies.
For some companies, the exposure to China’s economic flu is significant. In 2014, Intel generated 20 percent of its revenue from China-based customers, though not all customers may have been Chinese; the company releases its fourth quarter results Thursday. By contrast, 25 percent of Apple’s revenues come from China. More than half of YUM! Brands (KFC, Taco Bell, Pizza Hut) sales are in China.
But overall, only 7 percent of U.S. exports go to China, which accounts for less than 1 percent GDP. In September, after the August sell-off in China triggered a drop in U.S. stocks, JP Morgan estimated American companies generate less than two percent of their sales from China. Accounting for the financial risk of China may be easier than the emotional risk it poses for investors.
Financial journalist Tom Hudson hosts The Sunshine Economy on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.