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The S&P’s Record Push Relies on a Questionable Theory

Shuli Ren

(Bloomberg Opinion) -- The Covid-19 recovery is taking very different shapes in the world’s two largest economies. In the U.S., retail sales have staged a striking rebound to pre-pandemic levels, while industrial production remains sluggish. The opposite is true in China, where factories are churning but shoppers aren’t spending.  

Many see China’s industrial rebound as a plus for cyclical stocks. In August, energy and industrial companies gained 5.9% and 7.6%, leading the S&P 500 Index toward a record close. The retail revival, meanwhile, is lifting growth stocks, with consumer names continuing their slow, upward crawl. 

This might lead you to believe that value stocks can finally perform without a rotation away from growth sectors. That’s wishful thinking. Dig deeper and you’ll see that the rebound is nothing but fiscal dollars at work. The true resilience of these two economies is still untested. 

China feels it has more control over businesses than consumers, so it stimulates its economy by building new bullet trains and 5G base stations. State-owned factories were instructed to reopen as soon as virus cases came down, while Beijing’s infrastructure push is underpinning the production rebound.

Will this largesse remain for the rest of the year? China isn’t plagued with political stalemates. Yet local governments, which carry out most stimulus projects, are bound by math — and money is tight. Their funding gap will reach as much as 11.5 trillion yuan ($1.7 trillion) this year, or roughly 12% of gross domestic product, according to the Ministry of Finance. Various levels of the government have issued a whopping 4.3 trillion yuan of notes so far this year, contributing to a bond market rout.

In the U.S., similarly, it’s fiscal stimulus that’s propping up retail sales. From mid-May through late July, the Treasury Department’s withdrawals for unemployment benefits averaged about $25 billion per week; that outlay halved to $11 billion in the second week of August, as the $600 unemployment stimulus check was allowed to expire.

If China, which emerged from lockdown earlier, is any guide, the U.S. consumer spending spree will be fleeting without Uncle Sam’s paychecks. In May, when China relaxed social distancing rules, shoppers went for durable goods such as cars and furniture. In June, they upgraded their home appliances. But by July, there was only appetite for groceries and small, feel-good items such as cosmetics. The Chinese are still apprehensive about dining out, and clothing — even at deep discounts — has no appeal. 

Granted, we are in a summer lull, and the S&P’s upward grind is accompanied by dwindling trading volume and sleepy interpretations of macro data. Once the fiscal dollars run out, though, our S&P retail therapy is over.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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