The US stock markets have had a bumpy month. On Monday, August 24th, the Dow Jones Industrial Average was down 1000 points at one point during the day. This followed a sell off of the markets on the previous Thursday and Friday. However, momentum quickly shifted after that 1000 point drop and the Dow finished the week up 1.1%. What is causing the volatility?Some people will say that the US market was due for a drop but most point to the Chinese economy as the cause of the problem. China's economy has seen remarkable growth over the past 15 years growing at over 10% each year. As they shift from an economy that manufactures and exports things to one were the people buy and consume products and services China is finding out that keeping up that 10% annual growth is difficult. Why does what's going on in China impact our markets in the US?Even though the US trades more with Canada and Mexico than it does with China (exports to China only account for 1% of US GDP), China is still the second largest economy in the world. When we hear that China is taking similar steps that the United States and Europe took of injecting the economy with money and devaluing their currency, fears of a global crisis like we saw in 2008-2009 are revived. Even though the markets have made new highs since 2008, the scars are deep and the memory is fresh from that crisis. An interesting book on China I recently started reading is Dealing with China, by former Treasury Secretary Henry Paulson. How does today compare to 2008? The key difference today? We are not at the epicenter of a financial crisis. US economic fundaments are reasonably solid- a growing economy supporting corporate profits, and rock-bottom interest rates.
What can we expect to see going forward?
In the short-term emotions will probably remain high. If there is additional weak economic information from China we can see another spike in market volatility. More devaluation of the Chinese currency could lead to more fear of global deflation. No one likes seeing the value of their portfolio drop, but
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