The S&P 500 has regained some of the ground it lost last week, but it is experiencing more gyrations on Wednesday. So far this week, the index is up by 1 percent, after falling by about 5 percent between Oct. 8 and Oct. 12. But don't get ready to celebrate just yet – slowing Chinese growth could send global markets on another wild ride.
According to most experts, last week's decline was due to the rise of the 10-Year Treasury yield, which spiked to 3.2 percent. But there may have been another reason as to why stocks fell: On Oct.8 the International Monetary Fund downgraded both Chinese, American and global GDP growth for 2019. China's economy, it said, will grow by 6.2 percent next year, down from 6.6 percent this year, while America's GDP will expand by 2.5 percent in 2019, slower than the 2.9 percent it's expected to grow by this year.
Liu Chang, an economist specializing in China with Capital Economics, thinks growth could be even slower. "We don't trust official GDP data in China, so we think actual growth now is 5.5 percent instead of 6.7 percent," he said. "And our measure has growth slowing more next year."
While China has ways to prop up its economy in ways others don't have — it can lower interest rates or increase spending, and it is doing some of that — if the country's growth slows more than expected, or if its currency continues to fall, then global markets could get spooked. "If investors are worried about a hard landing in China, which I don't get the sense of right now, then we could see a repeat of what happened in 2016," Chang said.
It was in January of that year the S&P 500 fell by 10.5 percent, its first correction since the financial crisis, because of fears over slowing Chinese growth. At that time, the Chinese government began removing large amounts of stimulus it had pumped into the economy to help boost growth. Its growth has been below 7 percent — a much lower growth rate than it has been used to — ever since.