A 2011 Paper Totally Predicted What’s Happening With China’s Economy Now
In March 2011, economists Barry Eichengreen, Donghyun Park, and Kwanho Shin released a working paper titled “When Fast Growing Economies Slow Down: International Evidence and Implications for China.” The paper focused on the rapid growth of large emerging markets in the late 20th and early 21st centuries, and in particular, the double-digit growth coming out of China. Then it asked: When might China’s economic engine slow down? Here’s what they found:
The evidence suggests that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015.
That’s from the abstract of the paper, which was tweeted out over the weekend by Wonkblog’s Matt O’Brien. And after the past few weeks of China’s currency devaluation, bad economic data, and stock market turbulence, it’s looking more and more prescient. In their paper, the economists looked at historical instances of slowdowns from around the world. They found that slowdowns were most strongly associated with a drop in total factor productivity growth from 3-plus percent to nearly zero. Slowdowns, they wrote, “coincide with the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish.” As noted in the paper’s abstract, slowdowns also tended to occur when per capita incomes (in 2005 prices) climbed to around $17,000 and when manufacturing accounted for around 23 percent of total employment. Countries with greater dependency on aging populations and with “dramatically undervalued currencies” were also more likely to experience slowdowns.
Earlier this week, I called up Eichengreen to see whether he thought the forecasts made in his 2011 paper held. “They fit the China we’re seeing today,” he told me. “I think we are seeing two separate things. The growth of the economy has slowed from 10 percent a few years ago to somewhere in the 6 to 7 percent range, and that’s what we talk about in the paper. And then there’s a second, largely separate phenomenon where the stock market more than doubled since between last December and the beginning of the summer, and now it’s given back about half of what it gained, and you know all kinds of people are nonplussed, all kinds of small investors and local investors and others took steps on the stock market. They were encouraged to do so by authorities to juice the economy a bit. But now those efforts have unraveled.”
In their paper, Eichengreen and his colleagues predict that China’s economy will grow by 6.1 to 7.0 percent annually in the current decade, and then by 5 to 6.2 percent in the following. While those projections largely tracked with previous research, some 2010 work from the Conference Board was grimmer—suggesting China’s growth could decelerate to 6.1 percent and then to 3.9 percent by 2020. As core segments of the Chinese economy like consumer spending, construction, and financial services have swooned recently, worries about what kind of sluggishness the government’s official numbers might be hiding have increased dramatically. China’s decision to devalue its currency exacerbated this, triggering concern that authorities had forsaken efforts to rebalance the economy and were falling back on exports.
Are those fears unfounded? Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, thinks yes. “Rather than a financial and economic meltdown, China is experiencing an overdue correction in its equity market,” he writes in a Wednesday op-ed in the New York Times. Eichengreen has a similar stance. “We haven't seen anything that should worry us yet,” he tells me, referring to China’s currency devaluation. “But people reacted negatively, the markets reacted negatively, because they think a first 3 percent could be followed by a second 3 percent, and a third 3 percent.” So far, though, that hasn’t happened. As for the broader economic slowdown in China, which has seemed to catch investors off guard and spark so much chaos in global markets? At least three economists saw it coming years ago.
The Economy Grew Faster Than Everybody Thought Last Quarter
After the past couple weeks of stock market nuttiness here and abroad, it's nice to have a reminder that the U.S. economy has, fundamentally, been doing pretty well as of late. Today, the government reported that from April through June, real gross domestic product grew at a brisk 3.7 percent annual rate, much faster than the previous estimate of 2.3 percent. Huzzah!
What drove growth? The biggest boost by far came from consumer spending, which may be a sign that families are feeling more confident, or at least comfy making a trip to Walmart/Target/Old Navy with the extra cash they're saving on gasoline. Exports also grew faster than imports, for which we may be able to partly thank cheap oil. Meanwhile, business investment in things like office buildings ramped up, and companies stockpiled more goods in their inventories, which suggests they expect healthy sales in the near future.
As the WSJ cautions, all of this data is for the last quarter, and it's not clear how many of these trends have held up. But given that there was already plenty of economic strain overseas during the spring—China's stock market might be in seizures now, but its growth problems have been slowly building for a while—it's comforting to see that the U.S. has managed to keep doing what it has for the past several years and soldier on.
Walmart Will Stop Selling Assault Rifles
Walmart is taking assault rifles like the AR-15 off its shelves as it restocks for the fall, Quartz is reporting. Walmart carries these rifles in less than a third of its stores and plans to replace them with shotguns and other hunting weapons.
The AR-15 was infamously used in the mass shooting at a school in Newtown, Connecticut, and is heavily regulated in a handful of states. Earlier this year, the Obama administration sought to ban a type of bullet used in assault rifles. But Kory Lundberg, a spokesman for Walmart, says the decision to stop selling assault rifles was not motivated by politics. “The decision was completely based on what customers are buying and what they want,” Lundberg tells Quartz.
Here’s bit more context from Bloomberg:
Wal-Mart has been selling modern sporting rifles, the industry term for guns that look like the military-style M-16 rifle, at about a third of its U.S. locations. In 2006, the company reduced the number and variety of guns it offered in stores and replaced them with more upscale products such as exercise equipment. It then reintroduced firearms to many locations in April 2011, part of a broader strategy to add back merchandise and boost sales growth at U.S. stores.
While sales of the rifles themselves are being phased out, Walmart will continue to carry AR-15 ammunition.
New Uber Service Sounds Suspiciously Like a Bus
Uber is testing a new feature, “Smart Routes,” in San Francisco. Smart Routes is the latest addition to UberPool, the truest “ride-sharing” option under Uber’s umbrella of on-demand services, since it actually involves sharing and splitting a car with another person who happens to be traveling your way. Smart Routes builds off of that concept by allowing passengers to select a pickup spot along a predetermined route in exchange for at least a dollar off the fare. Currently, Uber is experimenting with two routes in San Francisco: Fillmore Street between Haight Street and Bay Street, and Valencia Street between 15th and 26th streets. Passengers using this option still get to specify individual drop-off points, which do not need to lie along the Smart Route.
No, you’re not crazy. Uber basically just announced that it’s invented a bus.
UberPool was announced a little over a year ago now as a “bold experiment” designed to further the company’s vision of “a more energy-efficient world with less traffic congestion and pollution in our cities.” Presumably, Smart Routes is an equally bold experiment. The new feature “aims to simplify pick-ups by encouraging riders to request a ride along specific routes in San Francisco,” Uber says in a statement. “Smart Routes is part of our ongoing efforts to increase the efficiency of our driver-partners’ time spent on the road while helping riders save times and money.” See? Bold. With all that talk of efficiency and saving time and money, it almost sounds like Uber is taking the tried-and-true concept of a public bus and privatizing it.
To be fair, Smart Routes isn’t exactly like a bus. Pickup locations are flexible along the route, and the drop-off can still be wherever the rider chooses. Also, your typical bus holds a lot more people than your typical Uber car, which means the bus is probably going to make a lot more stops and take longer overall to get from Point A to Point B. (For now, Uber isn’t placing any restrictions on what kind of car you need to pick up Smart Routes passengers.) At the same time, you can kind of imagine a future where Uber starts asking drivers for Smart Routes to have bigger vehicles or, I don’t know, looks into bringing in some people licensed to drive actual buses. Think how efficient drivers would be! Think how much money riders would save! Everyone’s private driver wouldn’t really be anyone’s private driver anymore. Now that would be bold.
The FDA Will Not Tolerate Eggless Sandwich Spreads That Purport to Be “Just Mayo”
Real mayo isn’t just a Heinz slogan. No, in the great United States, real mayo is something defined in the Code of Federal Regulations. Let’s examine it ourselves in Title 21 (“Food and Drugs”), Chapter I (“Food and Drug Administration, Department of Health and Human Services”), Subchapter B (“Food for Human Consumption”), Part 169 (“Food Dressings and Flavorings”), Subpart B (“Requirements for Specific Standardized Food Dressings and Flavorings”), Section 169.140 (“Mayonnaise”):
(a) Description. Mayonnaise is the emulsified semisolid food prepared from vegetable oil(s), one or both of the acidifying ingredients specified in paragraph (b) of this section, and one or more of the egg yolk-containing ingredients specified in paragraph (c) of this section. One or more of the ingredients specified in paragraph (d) of this section may also be used. The vegetable oil(s) used may contain an optional crystallization inhibitor as specified in paragraph (d)(7) of this section. All the ingredients from which the food is fabricated shall be safe and suitable. Mayonnaise contains not less than 65 percent by weight of vegetable oil. Mayonnaise may be mixed and packed in an atmosphere in which air is replaced in whole or in part by carbon dioxide or nitrogen.
This definition has become an actual problem for Hampton Creek, a San Francisco–based food technology company and maker of eggless mayo substitute Just Mayo. The issue, as you might have gathered from our brief dip into the federal code, is that the FDA does not believe that Just Mayo is, in fact, mayo. Specifically, the FDA feels that Just Mayo and related Hampton Creek products “purport to be the standardized food mayonnaise due to the misleading name and imagery used on the label, but do not qualify as the standardized food mayonnaise as described under 21 CFR 169.140.” This is from a warning letter sent from the FDA to Hampton Creek CEO Joshua Tetrick, via overnight mail, dated Aug. 12 and posted online Tuesday. The FDA also notes that Hampton Creek makes certain claims about the nutrient content and healthiness of its products, but that the products themselves don’t meet the FDA’s bar for being able to make such boasts.
The upshot of all this is that the FDA has deemed Hampton Creek’s Just Mayo products “misbranded” under Section 403 of the Federal Food, Drug, and Cosmetic Act. You might say Hampton Creek has impugned the integrity of mayonnaise itself. “Mayonnaise is a food for which a definition and standard of identity has been prescribed by regulation,” the FDA writes. “These products do not conform to the standard for mayonnaise.” Hampton Creek is expected to “take prompt action to correct the violations,” which surely means either changing the name of its signature product or fighting the agency. Either way, that promises to be a giant headache for Hampton Creek, which only just got past a lawsuit over the definition of mayo brought by the maker of Hellmann’s. So yeah, rough break. Though it’s kind of funny to think that the one thing Silicon Valley might not be able to disrupt isn’t taxis, or laundry, or 911, or even food in general. It’s emulsified semisolid food.
If You Panicked Over the Stock Market, Don’t Sweat It. Society’s Given You Every Reason to Do So.
At the close of trading Monday afternoon, the S&P 500 was down by more than 10 percent from its recent highs. On Tuesday morning, it opened with a gain of more than 300 points.
So what to do?
Over the past several days, we’ve been told this “tumble” is a “buying opportunity,” and we “shouldn’t panic” and sell off our stock holdings. Instead, we need to “stay the course.” Others all but accused us of being a bit greedy. When USA Today stepped forward to remind us that “the broad U.S. stock market was still up by almost 200% since March 2009,” you could almost hear the reporter muttering “what are you complaining about?” under his breath. And fair enough.
Yes, panicking is the worst thing someone can do when the stock market is volatile. It’s also the exact thing we should expect to happen.
Since the 1970s and 1980s, Americans have embarked on an experiment in how to help people prepare for retirement. Instead of increasing Social Security payments, or encouraging more employers to offer pensions, we instead pushed voluntary savings and investment options such as Individual Retirement Accounts and employer-offered 401(k) plans. They were pitched as all-but-surefire ways for us to retire as millionaires. All you need to do is give up a small luxury—like your daily Starbucks latte—and just wait 30 or 40 years.
This strategy, for the most part, has been an utter failure for all but the wealthiest Americans. Regardless of the short-term machinations of the stock market, the do-it-yourself retirement revolution has left the United States on the verge of a retirement crisis, with the Center for Retirement Research at Boston College projecting that a sizable minority of Baby Boomers and a majority of Gen Xers will experience falling living standards in retirement.
What went wrong? A good percentage of people cannot or will not save the money at all, finding it all but impossible in an economic climate where salaries are stagnating as costs of housing, health care, and education continue their inexorable rise. Others will invest badly, or see a decent chunk of their savings eaten away by fees imposed by the financial services industry, fees they collect whether the markets go up or down. Still others simply don’t receive much help at all from their employers. The result? A recent AARP poll discovered that more than two-thirds expressed fear that they would outlive their savings and a solid majority expressed “concern” that their employers could change their retirement savings benefits at a whim. As a result, just under half of Baby Boomers say they plan to work past the traditional retirement age of 65, though its questionable how realistic a plan that really is for many. A combination of age discrimination, ill health, and family responsibilities appears to force many out of the paid workforce, no matter what they intended to do.
Yale University professor Jacob Hacker calls this The Great Risk Shift, this handoff of planning, from society and government to the individual. And it’s forced individuals to be almost solely responsible for everything from investing acumen to good luck.
Cheerleaders—and even people simply trying to make the best of things—like to point out that on a long-term basis, stocks are still a good investment. Jeremy Siegel, the University of Pennsylvania professor famous for espousing this view, estimates that stocks gain more than 6 percent annually over a more than 100-year period. That’s better than pretty much any other investment out there— but that doesn’t help people feel less scared, or frightened.
Not surprisingly, the less money people have on hand, the less they want to do with the stock market, which they appear to view as a giant casino, with odds that don’t favor the little guy or gal. Last year, the Wall Street Journal broke down data from the Federal Reserve’s Survey of Consumer Finances to show that a majority of Americans reduced their stock market participation between 2007 and 2010, with only the wealthiest 10 percent of households increasing their investments.
So what do Americans want? Well, one thing people appear to think would help them with their future planning is an increase in Social Security payments. Last year, the left-leaning Lake Research Partners found just under 80 percent said they thought benefits should be increased by having wealthier Americans pay more into the system. This viewpoint transcended party lines, garnering support from 90 percent of Democrats and 73 percent of Republicans.
Do this, and we will almost certainly see a lot less panic over stock market performance.
A Crystal-Clear Explanation of Why Global Stocks Plummeted
Let’s get started. Give me the latest.
Happy Tuesday! Stocks in China sold off again overnight. Elsewhere, things look to be stabilizing. European shares opened higher. U.S. futures are pointing sharply up.
Whoa, slow down. I still hear Jim Cramer yelling and feel vague pangs of doom. What the hell is happening?
A lot! Stock markets have been in tumult all around the world since last week. But Monday was especially violent—think barrels tumbling off Niagara Falls. It was bad in China, in London, in Japan. Here in the States, the S&P 500 dove about 4 percent, with the Dow and the Nasdaq taking similar spills. Over the past five days, the benchmark S&P index has lost more than 200 points, or about 9.7 percent, putting it on track for the worst August in 17 years.
So far on Tuesday, shares in Shanghai closed down another 7.6 percent. They’ve now toppled more than 15 percent over the past two days alone. This, despite the fact that China’s central bank injected 150 billion yuan (about $23.4 billion) into the financial system. Analysts have started describing that market with adjectives like “self-imploding.” Exciting stuff!
Donald Trump says this is all China’s fault. Is it China’s fault?
Kind of, though it’d be a gross oversimplification to pin this all on China. But financial, economic, and monetary worries in the Middle Kingdom are definitely spooking U.S. investors.
So what exactly did China do?
The shortish version is that this all started two weeks ago when China decided to devalue its currency. For two straight days, China’s central bank allowed the yuan to fall by nearly 2 percent, then keep edging down. This caught a lot of people off guard. China has kept a tight grip on its currency exchange rate for 20-some years. Since March, the yuan hadn’t moved more than 0.3 percent in a single day. For it to suddenly plunge 4.4 percent in a matter of days sent shivers through the global markets.
On top of that, we’ve also seen a lot of scary economic data come out of China over the past two weeks. Exports, a traditional mainstay of the Chinese economy, slumped a worse-than-expected 8.3 percent in July. (One theory for why the People’s Bank of China let the yuan slide was to prop up exports.) In August, China’s factory sector shrank faster than it had in six years. Sales of smartphones in China during the second quarter fell year over year for the first time ever. By official tallies, China’s economy is growing at a rate of 7 percent. But based on everything else we know, that’s looking less and less like reality.
That was the short version? That wasn’t short!
OK, fair. But it was shorter than the longer version.
Uh, do I need the longer version?
Well, here it is in a nutshell. Basically, people knew that China’s economy was slowing, but they didn’t know by how much. Everything that’s happened recently—the currency devaluation, the spate of poor economic data, the generally baffling response from Beijing—has only served to increase two fears. One, that China’s economy is in much worse shape than anyone realized. Two, that Chinese policymakers don’t actually have some grand master plan for the economy that explains the ups and downs of the past few weeks—that they might just be winging it.
Both of these scenarios are terrifying to investors worldwide because of the outsize role that China plays in the global economy. China is second only to the U.S. in terms of gross domestic product. And in recent years, China has accounted for up to half of global growth, though it makes up just 15 percent of global output. But core segments of the Chinese economy are sputtering, like consumer spending, construction, and financial services. Some economists fear certain provinces and regions could be facing outright recessions. Once China’s slowdown gets big enough, it doesn’t happen in isolation—it drags the rest of the world along.
OK, that’s China. But someone on CNBC is mumbling about the Federal Reserve. Should I be pissed at Janet Yellen?
Janet Yellen is a delightful, brilliant woman, and you should harbor no ill will toward her.
But yes, some of this might be the Federal Reserve’s doing. For a while now, the central bank has been signaling its intention to hike interest rates, which has people scared for a couple of reasons. Higher interest rates make borrowing more expensive, which is generally bad for corporate profits and stocks prices. They also make the dollar more valuable, since they reduce the chances of inflation, and attract more foreign investment into things like Treasurys and U.S. corporate bonds.
The dollar has already been on a tear, and it could be a problem for the rest of the world if it goes higher, since it will become harder for international companies that borrowed in dollars to pay off their debts. On the flip side, a pricier greenback makes it tougher for U.S. companies to sell their stuff abroad. Which is why some people are wondering whether all the tumult we’ve seen might well convince the Fed to hold off on its increase for a bit.
Wait, let’s back up. What’s a stock market?
Don’t be cute, you know what a stock market is.
That said, I’m guessing you might have heard a few finance types talking about “equities” markets as well. “Equities” is just a fancy word for “stocks.” Don’t let the talking heads on TV confuse you.
OK. Those talking heads keep mentioning “a correction.” What’s that all about?
A correction is just the shorthand stock analysts use to describe when the market falls 10 percent below its recent highs. We’re just about there right now. Thankfully, Jonathan Franzen is in no way involved.
Phew. That guy’s a jerk. So should I sell my stocks and finally make use of that doomsday shelter I’ve been prepping?
The natural reaction in moments like these is to panic. But please resist the urge. Unless you desperately need the money in short order and can’t risk the market falling any further, it’s generally best not to sell stocks after a big drop. And if you do desperately need the money in short order, you probably shouldn’t have had it in stocks to begin with. When you need dollars on command, cash is king.
Should I buy some stocks, then?
Maybe? Obviously, it’s a good idea to buy low and sell high. And, typically, stocks bounce back after the S&P 500 falls by more than 5 percent in a week. But sometimes they don’t. A solid rule of thumb: If you were planning to invest some money anyway, and won’t need it for a long while, then now is as good a time as any to put money in the market. You’re certainly better off buying today than you were two weeks ago.
On another note, if you’re the sort of person who actively manages your retirement portfolio (in which case you’ve probably skipped over this section), it might be time to do a little rebalancing.
Is the American economy screwed?
Not really, or at least not yet.
First, keep in mind that stock prices aren’t the best measure of the economy’s overall health. Remember how crappy the U.S. recovery felt back in 2010? Well, shares were surging then. And while a bull market might slightly benefit the economy as a whole through a modest “wealth effect”—meaning that when portfolios rise in value, people feel richer and spend more—most families simply don’t own that much stock. In 2013, the bottom 90 percent of U.S. households laid claim to less than 20 percent of all shares, according to New York University economist Edward Wolff.* The fraction is even tinier if you exclude hard-to-access retirement accounts like 401(k)s. So, in a sense, when the market crashes, it’s mostly a problem for the rich.
Of course, there are some real economic troubles shaping up abroad that could hurt American businesses. Companies that sell lots of goods in China, like Apple and General Motors, could be in for a rough patch, for instance. But thankfully, the U.S. as a whole is a little bit insulated from the world’s troubles, because so much of our growth is driven by how Americans spend here at home, rather than by exports. In fact, the relative strength of the U.S. economy is part of the problem here. If the job market were weaker, the Federal Reserve wouldn’t seriously be contemplating an interest rate hike in the near future, which as we noted is one of the issues that people think is driving the market downturn.
There might also be an upside for middle-class families in all this: cheaper gas. With demand slumping in the rest of the world, the price of U.S. oil has fallen below $40 a barrel, which is quite cheap. Of course, this isn’t great for rig workers in the Texas or North Dakota. But drivers should be able to fill up their tanks for a song this autumn.
That said, there is some case for pessimism. America does export quite a bit. And if the rest of the world were to plunge into a serious recession, we’d probably start to feel some of the pain. And again, if the dollar’s value keeps rising, it will become ever harder for our businesses to sell smartphones, Chevys, and beef abroad, while making foreign profits that have to be converted into dollars less valuable. So there could be some trouble ahead. And given that the outlook for U.S. growth is fairly weak already, we don’t have a huge buffer to rely on.
I’m still gripped by a nebulous sense of dread. Is there any way this could turn into a financial crisis like 2008?
It’s highly unlikely.
While everyday investors care a lot about stocks, share prices aren’t really essential to the health of the world’s financial system. By contrast, securities backed by American mortgages, which really had become the lifeblood of global finance, turned toxic in 2007 and 2008, which led investors to panic. It all came to a head with the collapse of Lehman Brothers, which sent the market into paroxysms because a) Lehman was a very large investment bank that owed lots of people money and b) nobody knew whether the U.S. would allow other major financial institutions to fail. Right now, it’s really hard to envision a similar chain of events. Meanwhile, Bloomberg seemed to float the idea that by devaluing the yuan, China could set off a currency war with consequences similar to the emerging market crisis of the 1990s. But it also didn’t find a single expert who thought that was realistic.
You seem awfully relaxed about all this. Should I just completely tune all this market news out? Why does any of this matter to my life?
We should all strive to be informed global citizens. Also, in the unlikely event that the entire world really does collapse into a financial crisis, you won’t have to waste time catching up on the action.
*Correction, Aug. 25, 2015: This post originally misspelled Edward Wolff’s last name.
The Stock Market Plunge Is Great News for Walmart
The market carnage of the past week has been indiscriminate—big stocks, small stocks, tech stocks, old economy stocks. You name it. The sell-off is happening in part because China is weak. And that’s bad news for U.S. investors. And they’re getting poorer, that eventually could be awful for the American economy at large. All this weakness—in China, in the U.S., everywhere—is in turn bad for commodities and stocks. That logic is especially germane for companies that get a lot of their sales from China’s aspiring consumers—like, say, Apple, or BMW, or Tesla—and for rich stock-holding people in the U.S.
But what if you’re on the other side of this trade. What if you’re a company that benefits when economic conditions in China weaken and whose core U.S. customers don’t have wealth in stocks and experience the commodities slump chiefly as a tax cut.
Well, you’d be Walmart.
Walmart, the largest U.S. retailer and the largest private-sector U.S. employer, sure doesn’t seem like it’s benefited from recent developments. For the past few months, it has been underperforming the S&P 500, in part because of a disappointing profits report. And in the past few days, it has swooned along with the rest of the market. (Here’s the six-month chart of Walmart vs. the S&P 500.) It’s lost about a quarter of its value since February.
There’s a case to be made, however, that the events of the past week are actually good for Walmart. One of the events that precipitated the recent round of selling was China’s move effectively to devalue the yuan. But Walmart’s big box stores are effectively conduits for goods—kitchen utensils, toys, diapers, clothing—made in China and other emerging markets, some of whose currencies have also fallen lately. The devaluation of the yuan and other currencies means Walmart, which purchases goods in dollars, will be paying significantly less for a lot of the products it sells going forward. In an industry that runs on thin margins (in the most recent quarter, Walmart’s net income was about 3 percent of sales), that’s a significant boost.
At the same time that it’ll be paying less for goods, the capacity of its core customer to spend is actually rising. The decline in the stock market will put a halt on some high-end spending. (Something tells me it is going to be a quiet weekend at the newly opened Maserati of Westport, Connecticut.) In 2010, the top 10 percent of Americans held about 80 percent of stock wealth. (The proportion is surely higher now.) About half of Americans don’t own any shares. In 2012, Reuters reported, Walmart core customers were Americans with incomes between $30,000 and $60,000. The typical Walmart consumer depends on wages—not dividends and capital gains—for consuming power. That customer is much more sensitive to changes in gas prices than to changes in the price of oil stocks.
And with oil having fallen to less than $40 a barrel as part of the China-led market rout, the cost of gasoline is plummeting. According to AAA, gas costs about $2.60 per gallon now, down about 25 percent from a year ago. The falling price of gasoline is putting extra spending money in the pockets of all Americans. But the falling price in this fixed cost is a particular boon to people on the lower end of the income scale, for whom an extra $10 or $20 to spend weekly is real money.
Walmart has been getting some sales momentum, in part because of the underlying factors that support its business model—persistent job gains, a slowly rising floor under wages. In the most recent quarter, same-store sales, the key metric for retailers, actually rose 1.5 percent for Walmart’s U.S. stores.
So for now—at least until the stock market weakness starts to spill over into the real economy—the carnage contains some good news for Walmart. The cost of its goods will fall, and its core customers will show up at its stores with more cash.
Which U.S. Stocks Got Hit Hardest in Monday’s Global Sell-Off?
Now that Monday’s closing bell has tolled, let’s assess the damage. The S&P 500 plunged 77.7 points or 3.94 percent. The Dow lost 588 points or 3.58 percent. The Nasdaq shed 180 points or 3.82 percent. It was the fifth straight day that U.S. stocks fell amid a broader sell-off around the globe. The S&P headed into a correction for the first time since 2011 and is on track for its worst August performance in 17 years.
Hardest hit were commodity and energy shares. Six of the S&P 500’s Top 10 worst performers on Monday were oil and gas companies, while copper and gold producer Freeport-McMoran was seventh. In the tech-heavy Nasdaq, Citrix Systems led the bloodbath with an 8.7 percent drop, closely followed by Baidu (down 7.1 percent), and Netflix (down 6.5 percent). Over at the Dow, the downturn was less severe—the worst drop was Cisco’s 4.2 percent, which looks practically rosy compared with the numbers being posted by stocks in the other two major indices.
Overall, though, pretty much everyone was in the red. On bigger-name tech companies, Amazon tanked 5.3 percent, Tesla 4.3 percent, and Yahoo 4.2 percent. In blue chips, McDonald’s lost 3.7 percent and Goldman 3.5 percent. General Motors toppled 5.5 percent, Ford fell 4.9 percent, American Airlines Group slid 4.6 percent—you get the picture. I’ll stop before I run out of verbs.
Why is this all happening? People are worried about China. People are worried about the Fed. People are less worried about Apple, but Apple might need to be worried about the note its chief executive sent to reassure investors earlier in the day. Don’t believe anyone screaming to buy cheap shares. Also, don’t liquidate your equity holdings for canned goods. No one really knows what’s going on. Tune in tomorrow.
Tim Cook to Investors: Don’t Panic. Apple Is Doing Just Fine in China.
As global markets convulsed Monday morning, Apple chief executive Tim Cook took a moment to reassure investors. “I can tell you that we have continued to experience strong growth for our business in China through July and August,” he wrote in a letter to Jim Cramer, the host of CNBC’s Mad Money. “Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”
For the moment, Cook’s note seems to have been effective in soothing investors. Apple’s stock slid 10 percent at the opening bell but has since recouped those losses, and was trading up about 2 percent to $108 as of early Monday afternoon. His update also aligned with a report released by tech research firm Gartner last week, which said that total iPhone sales in China ballooned 68 percent to 11.9 million units in the second quarter, even as overall smartphone sales in China declined year over year for the first time ever. Apple has had tremendous success with the iPhone in China. Earlier this year, the company snagged the title of best-selling smartphone, buoyed by demand for the iPhone 6 and iPhone 6 Plus.
But Cook’s email could turn into a legal headache for Apple. Lawyers contacted by MarketWatch say Cook may have violated the Securities and Exchange Commission’s Fair Disclosure regulation. “The SEC will undoubtedly want to take a look at this,” Thomas Gorman, a partner at Dorsey & Whitney, told MarketWatch.
Cook’s full email, as tweeted this morning by CNBC’s Carl Quintanilla, is below: