Monday , 17 June 2024

S&P 500 Prospects Not Good Given Economic Situations in Europe & Asia – Here’s Why

…[V]iewed objectively, the world currently stands at the precipice of an even greater crisis than the one in 2008-2009 but you wouldn’t know it by looking at US stock prices. The S&P 500 is down only about 10% from its peak levels in October 2007 compared to the leading indicator stock markets in Spain, Italy and China which…are all down by 60% or more since their peaks. It is folly to think that the S&P 500 index can long withstand simultaneous conflagrations in those countries because, as their economies go, so too will the entire global economy and [that is bound to adversely affect the U.S. as] close to 50% of all S&P 500 earnings are derived from outside the U.S.. Words: 840
So says James A. Kostohryz  in paraphrased excerpts from his post* on Seeking Alpha.
Lorimer Wilson, editor of (Your Key to Making Money!) and (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Kostohryz goes on to say, in part:

Below I provide charts of three equity markets that I consider to be “leading indicators,” in the current global environment: Spain, Italy and China. Spain and Italy…because the entirety of Europe’s economy will ultimately be driven by what happens to Spain and Italy and, by the same token, the fate of Asia’s economies will be determined by what ultimately transpires in China.

IBEX 35 (Madrid) vs S&P 500

(click to enlarge)IBEX 35 -- S&P 500

FTSE MIB (Milan) vs. S&P 500

(click to enlarge)FTSE MIB -- S&P 500

SSE (Shanghai) vs. S&P 500

(click to enlarge)SSE -- S&P 500

All three of the above charts…show unequivocal signs of serious distress and rapidly deteriorating financial and economic conditions. By contrast, the S&P 500 index is conspicuous for the apparent complacency reflected in its prices. This complacency must be considered rather anomalous given the global nature of the companies that comprise the S&P 500 index….

S&P 500 has Decoupled from Spanish, Italian and Chinese Stock Markets

The most important thing to note is that the S&P 500 has radically decoupled from Spanish, Italian and Chinese markets since mid 2011. Since that time, the S&P 500 has been essentially flat while the three leading markets highlighted have been in the midst of brutal bear markets that show few signs of abating. Furthermore, fundamentally and technically, the three leading markets highlighted appear headed for even lower lows.


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It is folly to think that the S&P 500 index can long withstand simultaneous conflagrations in Spain, Italy and China because, as these economies go, so too will the entire global economy. In this regard it is important to understand that close to 50% of all S&P 500 earnings are derived outside the US. Furthermore, the global economic imprint on S&P 500 EPS rises to well over 60% if the impact of globally priced commodities is factored into a sensitivity analysis.

The Reason For The Decoupling

US investors have enjoyed a remarkable decoupling of US stocks from global equity indices. The question is: Why has this occurred?

[While] various reasons could be cited…I think the most important reason is psychological.

  • A phenomenon has transpired that is akin to “the boy who cried wolf” parable. US investors have “gotten sick” of hearing about the European crisis and a possible hard landing in China. US investors have been constantly bombarded with warnings about these global threats for a year or more yet European economic growth is merely flat (as opposed to collapsing) and Chinese economic growth is tracking at close to 8.0%, which is more than respectable.
  • The fact that the crises in Europe and China have not transpired as feared has made US investors complacent. US investors have essentially “lost interest” in developments in foreign lands that they have little or no knowledge/understanding of, supposing that either crises in these regions will not occur, and/or that their own investments will not be seriously affected.


US investor apathy won’t change the course of events in Europe and China. Nor will current complacency prevent the consequences of these crises to ultimately become manifest in US investor portfolios. Whether you are an index investor in ETFs…or an equity investor in stocks with a strong global footprint…it would be foolish to think that the decoupling of US equities from global equities can continue for long.

US stocks have yet to decline because the feared foreign crises have yet to transpire. However, equity indices in the key nations are clearly signaling a high likelihood that such crises will occur. Fundamental economic data emerging from these nations reinforces this view.

Many that are bullish about US equity prospects take heart from such parochial fundamental information as US housing starts. Likewise, bullish chartists take heart from the price action of various domestic US equity indices and/or sub-indices.

I advise, however, that US investors adopt a much more global perspective:

  • Regarding fundamentals, given that the S&P 500 is an index comprised of companies that derive their profits primarily from international factors, investors should examine data regarding the economic cycle in key international economies.
  • Technical analysts should take a look at the price action of various international equity indices and/or sub-indices for clues about what may soon transpire in the US.

Viewed from the above international perspective, and particularly from the point of view of the three key “leading” economies and financial markets that I highlighted, the prospects for the S&P 500 are not looking good at all.

*  (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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