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China’s big warning for US markets

Talking Numbers

Is China's stock market's decline in 2013 a sign of things to come for the US in 2014?

The US stock market may be having a good year but the same cannot be said for China's.

While America's benchmark index, the S&P 500, is up 29%, China's Shanghai Composite index is down nearly 9% for 2013. Is the decline in stocks in the world's second-largest economy a sign of things to come for the US?

Chad Morganlander, portfolio manager at Washington Crossing Advisors, believes investors shouldn't read too much into China's woes.

(Watch: Look to Europe for outperformers in equities: Pros)

"It's a China-specific story," says Morganlander. He describes China's situation as a "hangover".

"The hangover was a misallocation of capital the economy has gone through for the last ten years," says Morganlander. "They're rebalancing their economy and, therefore, you're starting to see a deceleration of growth."

Morganlander expects Chinese GDP growth at about 7% next year compared to 3% for the US and 1% for the Eurozone. However, China's growth rates are less than what they were several years ago when they ranged between 10% and 14%.

"China had this huge run-up in the mid-2000s," says Morganlander. "Between 2005 and 2007, the market went up over 400%, so that's also another hangover they have to readjust to."

(Read: Australian shares gain after Dow's record close)

For Andrew Busch, editor and publisher of The Busch Update, China's markets could be a drag on US stocks, in part because they helped boost the US after the financial crisis.

"Back in 2009, China stimulated its economy much faster than the United States," says Busch. "It really led the way and it truly helped stabilize the global markets. As China grew, a lot of people sold to them. That helped bring up the S&P [500]."

Yet, since 2011, the S&P 500 has outperformed the Shanghai Composite, notes Busch. Now there's nearly 40% separating the two for the year.

"When I look at something like this, overall, it's very difficult for these two stock markets to stay disconnected at this extreme for a long period of time," says Busch. "The S&P is going to give up at least 5% or 10% of its value if the Shanghai drops another 5% or 10%. It's just very difficult for these two stock markets to act completely independently of each other."

To see the rest of the analysis by Morganlander and Busch on the effects of the Shanghai Composite index on US markets, watch the video above.

More from Talking Numbers:

Why FedEx beats UPS: Strategist
Why IBM (yes, IBM) may be the best Dow stock for 2014: Strategist
Peter Schiff: Why Wal-Mart can’t pay $15/hour wages


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