Stock markets around the globe tumbled hard on Monday for the second consecutive trading day, with the Dow Jones Industrial Average falling more than 1,000 points in the morning. (It’s since recovered a bit, and now stands only 475 points down.) This left people who haven't been paying much attention to wonder: what the heck is going on?
It's impossible to say with precision why markets rise or fall on any given day. But two key factors are likely contributing to the current sell-off: China and a long, steady run-up in prices. (Let’s call this the “what goes up must come down” explanation.)
This time around, China sneezed and we all got a cold.
China's economy has been chugging along for years at a growth rate of 7% or more. But lately, the country has been releasing weaker-than-expected economic data and the Chinese government has had to intervene, devaluing its currency, the yuan, to support growth. The slow-down and intervention likely spooked investors who expected China’s charts to keep going up. And because global markets are so interconnected – with the U.S. and Europe heavily dependent on China’s products and its investment power – what happens there can affect stock markets abroad, too.
2. What goes up must come down
Both Chinese and U.S. stock markets had been on a tear for awhile. In China, that was fueled in part by unsophisticated retail investors. In the U.S., a long string of encouraging economic data and a surge in tech stocks helped drive one of the longest bull markets in history. Observers have been warning about an inevitable “correction” for awhile.
Why did that correction happen today, rather than a month ago? Nobody really knows. But sometimes, all anxious investors need to start unraveling completely is an initial jolt of fear. And other times, the panic just starts on its own, when there’s enough built-up worry in the system.
Regardless of whether today’s stock market action is the result of China or just a cyclical, corrective fall, there’s no reason for most people to panic. In fact, there are bright sides to cheaper stocks, especially for young investors.
I oversee Fusion's money section and have spent most of my time as a journalist writing about banks and finance. I live in Brooklyn with my partner Geoffrey & our two dogs, Captain & Tallulah. Favs: leopard print, Diet Coke, gummy candy, Ireland.