🎙️Follow the Crowd

Before big banks kick off earnings season for lenders on Friday, the S&P 500 closed Wednesday at another fresh all-time high. Lately, good economic data has offset Middle East tensions and uncertainty before the U.S. presidential election. We’ll get the latest data on Thursday morning when officials release the Consumer Price Index for September 2024.

Later this week, investors will keep an eye out for clues on how rate cuts could impact banks’ performance.

Also: Officials have said Hurricane Milton, a dangerous Category 4, could be one of the worst storms to hit Florida in a century. Our thoughts are with the people of Florida as Milton makes landfall along the Gulf Coast.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Chinese stocks tumble most since 2020

• America’s flood insurance system requires urgent fixes

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

📉 Chinese Stocks Tumble Most Since 2020

At least for now, China’s stock market fever has come to a screeching halt. The euphoria is over. 

China’s epic stock rally ended this week after economic planning officials disappointed hopes for more fiscal stimulus to support Beijing’s struggling economy.

Historic fall: China’s benchmark CSI 300 index fell 7.1% Wednesday, its first daily drop in about a month and its worst single-day fall since early 2020, as COVID-19 was spreading rapidly. Hong Kong’s Hang Seng Index, including large Chinese stocks, fell 1.4% a day after posting its worst daily fall since October 2008. Several brokerages saw their apps sustain temporary freezes amid volume surges. 

• Chinese stocks enjoyed a historic run thanks to hopes for government stimulus to jolt a reeling economy. According to The Wall Street Journal, part of the run came as many individual investors opened new trading accounts last week.
  

• China’s property market is faltering, consumer sentiment remains low, and youth unemployment has stayed high. The jobless rate among 16- and 24-year-olds in China (excluding students) rose to 18.8% in August from 17.1% in July.
  

• Economists estimate that a fiscal stimulus package of one trillion to three trillion yuan, or between $142 billion and $425 billion, will soon emerge. Some say 10 trillion yuan — 8% of China’s GDP in 2023 — isn’t out of the question. 

The dragon: Economists say local governments need help, as they’re struggling with debt and reducing spending, which has hampered local economies. Others say billions of dollars are needed to turn empty housing properties into more affordable units. They also argue that state banks need injections.

That’s why one chief economist told the WSJ that a dragon — not a bull or bear — reflects a more accurate image of China’s stock market. “The image of the traditional Chinese dragon, in the process of rising, is often not a straight flight to the sky, but constantly goes up and down to store power and gradually circles up,” he said.

Why it matters:

China’s equity market, the second-largest worldwide, had been hot — jumping over 30% in the past month, the best performer among more than 90 global equity gauges Bloomberg tracks. 

But it has endured many boom-and-bust cycles, including 2014 and 2015. Could the same be in store here?

• “We need fiscal, and then hopefully some real major economic reform,” another strategist told Bloomberg. “By the end of this year, if we still do not have any major measure, we probably will end at this level.”

China’s durability moving forward: Even before the fiscal stimulus disappointment, some Chinese investors were growing concerned about stocks being overvalued. The CSI 300 Index is trading at about 13.3 times one-year forward earnings vs. a five-year median of 11.9 times. 

• “The durability of this China rally will depend on action following words on the fiscal side of the equation,” said a market strategist in Hong Kong. “The key thing we are watching going forward — what policies will be announced in coming weeks…That will determine if our overweight is a tactical one — to be taken off as relative valuations change – or a strategic one.”

Read more

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🌊 The Case for Revamping America’s Flood Insurance System

America’s flood insurance system might need a facelift.

Mark Gongloff, a Bloomberg Opinion editor and columnist covering climate change, argues that Hurricanes Helene and Milton provide the latest proof that flood insurance in the U.S. isn’t sufficient. 

Floods are the most common and destructive natural disaster, yet only 4% of U.S. homeowners have flood insurance. And the Wharton School estimates that less than one-third of homes are insured against rising waters in areas at high risk of flooding.

The low coverage rate is primarily due to outdated flood maps, underestimation of risk, and the voluntary nature of flood insurance outside high-risk zones. 

• FEMA estimates that 99% of U.S. counties have flooded at least once since 1996, and 40% of flood claims come from outside high-risk zones. The agency also says 1 inch of water in your house can do $25,000 of damage.
  

• That contrasts with the affordable $800 average annual cost for flood insurance.
  

• “Floods are low-probability but high-consequence events,” a Wharton professor, Robert Meyer, an insurance and consumer behavior expert, told Bloomberg. “Our brains are not well wired to make sensible decisions on that.”

The insurance system needs some help badly: The National Flood Insurance Program (NFIP), administered by FEMA, needs more money after a rise in natural disasters and a quadrupling of properties receiving repeated disaster payouts in the last two decades.

“We think bad things only happen to other people and forget the pain when bad things do happen,” Gongloff writes. “People also tend to follow the crowd; if their neighbors aren’t getting flood insurance, then they think it’s fine for them to skip it, too.”

Why it matters:

A warming world means warmer air, which means more water during storms because hotter air holds more moisture. 

Hurricane Helene has been the deadliest storm since Katrina, taking over 230 lives so far and doing roughly $250 billion in damage and economic loss, making it the second-most destructive storm ever (after Katrina). 

As a warming climate makes hurricanes and torrential downpours more frequent and destructive, Gongloff argues that the new climate necessitates better preparation for flood risks across the country. Difficult but necessary choices now could prevent expensive, painful decisions in the future. 

What could work? Experts have a few ideas for revamping the system, including:

• Make flood insurance more affordable through national or regional risk pools 

• Create housing resilience agencies to pool and reduce risk

• Overhaul insurance regulation to include all perils in homeowners’ policies

• Force insurers to cover all homeowners in a state or lose the right to cover any 

What would you add to the list of solutions?

Read more

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Quick Poll

On Monday, we asked: Do you pay attention to insider activity when you're buying or selling a stock?

— Roughly half of investors who answered said they pay attention to insider activity when buying or selling a stock. Wrote one: “Someone said it best when they said, “There are many reasons to sell a stock, but there is only one reason to buy. Insider Buys are more important than sells in my opinion.”

— Said another: If insiders buy, that's a good sign. But it doesn't tell me whether or not I would like to buy it.”

— Wrote another investor: “Unless it is a major change (sell all shares, for example) in a key management role, it means nothing other than the person has a reason to sell. Most want to diversify.”

See you next time!

That's it for today on We Study Markets!

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