Roubini Sees S&P 500 Slump Due to Downturn in China, Edwards Predicts 40% Drop Down to 500

[RedEarth]

Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities will fall 20 percent this year from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.4 percent so far, will rise 17 percent in 2009.

Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output declines and manufacturing shrinks. “Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”

Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, sparking a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.

Emperor’s Clothes

“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

http://www.bloomberg.com/apps/news?pid=20601080&sid=aBimSLLEdoLU&refer=asia

[CoffeeCat]

1. Do the S&P 500 and the DOW...

...always experience nearly identical trends?

I would assume that they would move together. Is that correct?

[RedEarth]

2. For the most part they do...

S&P is a broader index..500 large cap companies. Dow is 30 large cap companies that are suppose to reflect the economy as a whole. I normally pay more attention to the S&P since I feel it gives a more accurate reflection of the market.