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U.S.-Chinese Market Correlation (Or Lack Thereof...)

We were surprised here at out Kruse Asset Management office when we heard CNBC announce today that our domestic stock market had ceased to be in correlation with China.

This is what we were saying at the time of the downturn, as highlighted in the article posted on our website: Taking A Closer Look At The Market Downturn.

A comparison between the S&P 500 and Shanghai Composite Index from the start of 2012 to the end of August 2015.

"As can be seen by the graph above, despite the similar woes in August, there is in fact very little correlation between the two indexes. The S&P 500 had been remarkably stable in its performance, especially in comparison to China.

Indeed, if the American and Chinese markets are so closely bound to one another then why when the Shanghai surged in value by 42.57% from the start of the year to the end of May did the S&P 500 only see modest growth of 2.36%?

Instead, it would be more accurate to suggest that volatility in China simply gave American investors the opportunity to sell of stocks which had become overvalued over the past six years and bring about a healthy correction in the market.

In the world of investing it is common for people to look rationality in situations which can in fact be irrational. The downturn which the Chinese economy experienced—thanks to a slowdown in growth and the circumspect numbers given by their totalitarian government for years catching up to them—wasn’t a direct cause for the slump past August."

As we said then, it was simply a good reason for people to start selling off stock which had begun to reach overvaluation after six years of consecutive growth domestically.

A comparison between the S&P 500 and Shanghai Composite Index over the past year.

The chart above illustrates how relatively stable the S&P 500 continues to be in relation to the Shanghai Composite Index and this is taking into account the more significant downturn we have had since the start of 2016.

Investors should be aware that many television outlets in the financial news media have an inclination towards hyperbole and drawing conclusions which can seem particularly worrying—“China’s economy is doomed and America is going down with them!” for example. They have twenty-four hours of programming to fill on a daily basis, and need something to get people talking about at the same time.

Kruse Asset Management clients rest assured in the knowledge that we are able to cut through the media hoopla surrounding economic events and ensure that we do what is best for them and their portfolios.

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