Reality of China Economic Weakness Finally Hits U.S. Stock Market

The major U.S. equity indexes took a hit on Monday, driven lower by weaker-than-expected quarterly earnings, guidance and revenue from two bellwether U.S. corporations that highlighted the negative impact the ongoing trade dispute between the United States and China was having on China’s slowing economy. Trading conditions could intensify as investors brace for the busiest week of the corporate reporting season.

In the cash market, the benchmark S&P 500 Index settled at 2643.85, down 20.91 or -0.78. The blue chip Dow Jones Industrial Average finished at 24528.22, down 208.98, or -0.84%. The tech-based NASDAQ Composite closed at 7085.69, down 79.18 or -1.11%.

The selling in the S&P 500 Index was broad-based with technology, communications services and healthcare sectors leading the index lower. The Dow was led lower by shares of Caterpillar. The NASDAQ was dragged down by shares of Nvidia and Facebook, Apple, Amazon and Apple, which posted losses of 0.9 percent or greater.

Earnings News from Caterpillar and Nvidia was the catalyst behind Monday’s sell-off

According to CNBC, “Caterpillar shares fell 9.1 percent after the industrial giant posted weaker-than-expected earnings for the fourth quarter. The company said its sales in the Asia/Pacific region declined because of lower demand in China. Caterpillar is considered a bellwether for global trade given the company’s exposure to overseas markets. The company also issued disappointing guidance.”

“Nvidia, meanwhile, dropped 13.8 percent after slashing its fourth-quarter revenue guidance to $2.2 billion from $2.7 billion. The chipmaker said ‘deteriorating macroeconomic conditions, particularly in China,’ impacted demand for its graphics processing units.”

Concerns that Economic Growth in China is Slowing

Traders are placing the blame for the weakness in Caterpillar and Nvidia squarely on the impact of the trade dispute between the United States and China. This time the Fed is not to blame because it appears to be on a dovish path unlike the hawkish tone it set between October and December that fueled the steep drop in the stock market. On Wednesday, the Fed is widely expected to leave rates unchanged and could even announce the end of its balance sheet reduction program.

Last week, China announced that its official economic growth came in at 6.6 percent in 2018, the slowest pace since 1990. When this news was released on January 20, it raised concerns. However, the news about Caterpillar and Nvidia shows that the weakness in China is real. It should also lend urgency to the notion that the global economy is slowing.