Will China’s Crackdown on Big Tech Continue to Weigh on the Market?

(Please enjoy this updated version of my weekly commentary published August 23, 2021 from the POWR Value newsletter).

While the market finished Friday on a positive note, several factors led to a lower week. First, there were continued signs of an economic slowdown in China. China's regulatory crackdown on its most prominent tech companies pushed Asian stocks lower for the week.

In an effort to remind China's tech entrepreneurs not to get too big for their bridges, the country appears to be doing itself a disservice. Stocks in China are down more than 20% for the year. Even SEC Commission Chair Gary Gensler urged caution when investing in Chinese stocks due to the regulatory uncertainty.

In the U.S., concerns over the Federal Reserve tapering the central bank's monthly asset purchases also weighed on investor sentiment. The Fed released minutes of its latest policy meeting, which indicated that tapering could begin by the end of the year.

However, that's no reason for investors to get too alarmed. Dallas Federal President Robert Kaplan suggested that he might favor delaying the tapering if the delta variant of COVID 10 becomes an even bigger issue for the economy.

Investors are also concerned that growth may be peaking as retail sales fell more than expected. On Tuesday, the market was down after the Commerce Department reported that retail sales fell 1.1% in July. This was mainly due to auto sales, though, which fell 3.9%.

It appears that consumers are starting to balk at high prices, and automakers are still struggling with the ongoing global semiconductor chip shortage. The good news, though, is that sales picked up at restaurants and bars. This indicates that the recent uptick in COVID cases wasn't the culprit in lower retail sales.

Nevertheless, consumer sentiment is a concern. U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade. This could be a worrying sign for the economy as U.S. concerns are negative in their outlooks.

The University of Michigan said its preliminary consumer sentiment index fell to 70.2 in the first half of August from 81.2 in July. That was the lowest level since 2011. There have only been two larger declines in the past 50 years. One was during the 2007-2009 recession, and the second was during the shutdowns at the beginning of the pandemic.

My takeaway is that the surge in new cases brought on by the Delta variant could become a larger drag on the economy than most people would like to admit. This reading could give the Fed pause before pulling back on its stimulus measures.

As of now, though, the economy looks strong, even with concerns over the virus. This is especially true if you consider the current jobs picture. There are more jobs available than there are unemployed people to fill them. And the enhanced unemployment benefits are expiring in September.

This means we could see millions of workers rejoining the workforce over the next few months. Plus, the $1.2 trillion infrastructure bill and the $3.5 trillion budget framework could inject more spending into the economy.

So, there are some positives, especially for the equity markets. Stocks are still up for the year, and I expect to see more positive momentum as the U.S. economy grows. Plus, based on recent corporate earnings, many companies are doing well.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $448.41 per share on Tuesday afternoon, up $1.15 (+0.26%). Year-to-date, SPY has gained 20.72%, versus a % rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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