Shanghai 3000 has become one of those levels like Dow 10,000 that everyone knows to watch, but don’t forget, the Chinese market still exists in its own world, and bears little resemblance to what’s going on outside.
If you’re looking abroad for clues for investing, Japan is still the place to look.
A pair of charts from Claassen Research demonstrates this nicely.
First, a multi-year look at the S&P vs. Shanghai
And now the same for the Nikkei:
Just eyeballing it, you can see which one is more closely correlated to the US market.
But beyond that, another reason to look at the Nikkei is that Japan’s economy more closely resembles our own.
Here’s Claassen Research on the subject:
As is evident from the chart above, the Shanghai Index’s correlation to the US equity market appeared to start in late 2005 or early 2006.
Even then, because its volatility is significantly greater than the S&P 500, there have been numerous occasions where the Shanghai Index moved sharply in the opposite direction of the S&P 500, with
no consequence to the US market; a false signal.
Compare this correlation to the Nikkei 225 vs. S&P 500 in the second chart. In both charts the price axis is log based to normalize performance on a percentage basis. The Nikkei 225 and the S&P 500 are similar in volatility and share a much stronger correlation.
While the Nikkei 225 has coincided with the S&P 500 or lagged slightly at market lows, it has led slightly at both the last two major market highs.
The reason I first started using this comparison is still valid today. We all know that Japan has been fighting deflation since shortly after its market peaked in 1990. In 1997-98 deflationary pressures culminated in a currency crisis starting with the collapse of the Thai Baht and now known as the Asian contagion.
After the dust settled I noted that numerous asset classes that had not previously correlated began to correlate. It is evident that since the 1998 correction, global markets have been trading as if they were
more concerned with deflation than inflation. Japan, being the global economy most sensitive to deflation, evolved into a reliable coincident if not leading indicator of global growth.
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