Where were you on Monday, August 24, 2015, when the Dow Jones Industrial Average (DJIA) plunged more than 1,000 points before closing at a 588-point loss for the day?
The Standard & Poor's 500, a broad index of America's largest public companies, lost 11.3% from its all-time high in May on that day, and it fell more than 2% in value again on Tuesday. But U.S. stock market recouped half the losses by staging its third-biggest one-day gain ever on Wednesday, and it tacked on another 2.4% on Thursday before closing the week flat on Friday. The proximate cause of the tumult on Monday and Tuesday was China's devaluation a week earlier of its currency. That triggered a headline-grabbing crash in China's stock market that immediately echoed through bourses across the globe. During Monday's market mayhem, the bottom seemed to fall out from under U.S. stocks. But as scary and fast as this plunge was, it was about as surprising as a hurricane hitting the East coast in September. While past performance is never a reliable indication of your future result, comparing the freefall of August 24 with other major plunges since the financial crisis started in 2007, provides a proper context for understanding the emotional turns the stock market takes at times. Of the eight emotional one-day swings in the Standard & Poor's 500 since September 2007, four were milder than this past Monday's. Notably, however, three of the major plunges over last eight years were worse than the 11.3% drop sustained on Monday. Imagine that! Despite all the fear and selling Monday and Tuesday, Asian turbulence was downgraded from a hurricane to a tropical storm. And, by Friday, it seemed to have passed — at least for now. Dr. Mark DeWeaver of Quantrarian Capital, an Asian emerging markets specialist, says China's stock market crash was "a sideshow." DeWeaver, who lived in China from 1985 to 1994, says the Chinese currency devaluation will force countries that compete with China for exports to devalue their currency to stay competitive. It's a race to the bottom for Singapore, Hong Kong, South Korea, Taiwan, plus Viet Nam and Thailand. They are likely to be the victims of the Chinese business cycle. China's economic authorities, according to DeWeaver, will continue to invest and borrow to pay for growth. China is not yet capable of productivity growth. DeWeaver says China is rife with corruption at the local government level. The central government in Beijing periodically prosecutes a high-profile business offender for polluting water but then continues to turn a blind eye to other cases of businesses bribing local officials, and making a real killing. DeWeaver is smart but predicting the future is hard. So is investing for retirement in a world that is complex. We are here to help you make sense of things financially.
The stock market plunge to end all plunges never has happened. Behavioral finance tells us that we are all victims of "recency," a word coined to describe the human predilection to weigh the most recent news and events as more important than they are in the long run. In the stock market, it's manifested in plunges and surges in price. We're here to remind you in such emotional times of the economic fundamentals underpinning the economy, which, in the bad times like this past week, are so hard to otherwise remember. We're here to remind you that even bad times, people make things work, and eventually economic normalcy is restored. Despite all of man's faults, progress seems unrelenting. We're here to remind that the sun still rises even when it rains. Let us know if these words are helpful. | 