Dow Industrials Tumble 107 Points as China Jitters Jolt Stocks

Last week’s central bank-driven gains turned into today’s economic-disappointment driven losses.

REUTERS

The S&P 500 fell 0.8% to 1,994.29 today, while the Dow Jones industrial Average dropped 107.06 points, or 0.6%, to 17,172.68. The Nasdaq Composite declined 1.1% to 4,527.69 and the small-company Russell 2000 finished off 1.5% at 1,129.36.

The big news of the day: China’s finance minister said that the country wouldn’t act to boost its economy simply because industrial production has been slowing. Barclays’ Guillermo Felices and team think China will have no choice but to cut rates:

The rally in global equities late last week is going in reverse following further indications that Chinese officials are comfortable with slower economic growth. At the G20 meeting over the weekend, China's Finance Minister was reported (Bloomberg) as reiterating that further stimulus is unlikely in response to individual economic indicators. However, we continue to believe cuts to benchmark interest rates are unavoidable in the face of a broad-based slowing in economic growth. Indeed, we forecast China's September "flash" PMI (released tomorrow) to fall below 50 for the first time since May (Barclays: 49.6; cf: 50.0). Note we have lowered our China GDP forecast to 7.2% in 2014 and our euro area forecast to 0.7% in 2014 and 1.1% in 2015.

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BofA Merrill Lynch’s Savita Subramanian and team think the S&P 500 can get a boost from Baby Boomers looking for income-producing assets:

Risk assets could see pressure with a shift toward income and capital preservation. But the S&P 500 is a likely beneficiary of this rotation. Individuals and pensions may be underestimating the cost of funding increasing longevity, where longer retirements require a combination of capital appreciation and income growth. Also, Baby Boomers' real net worth is still 25% below peak, so the shift toward income may be gradual if they defer retirement. The S&P 500 offers an optimal combination of capital appreciation, competitive income and inflation protection. Nearly half of S&P 500 stocks yield more than the 5-yr Treasury bond. This, coupled with its record low dividend payout ratio, suggests that the S&P 500 is the asset class best positioned to offer competitive and growing income in a rising interest rate, rising inflation environment.

Of course, we still need to see rising rates and inflation, don’t we?