The stock market (S&P 500 Index) is down almost 10 percent (as of last Friday) since its high in July. You may be wondering what gives?
Source: eSignal, 2015
If you read or watch the news, you’re told the reason is China. China has been lowering their official economy’s growth rate over the past couple years. Supposedly, they are still growing at 7.5 percent. Very astute market observers like Jeffrey Gundlach and others have been skeptical of that official number however. They think China is actually growing a lot less, perhaps in the 2 percent range.
What’s the big deal you may wonder? The US is growing around 2 percent as well and the sky isn’t falling here. But China has been growing at double digits for over 2 decades. So this is a huge difference for them.
It’s finally taking a toll on our stock market. Just about every other asset class has been beaten up so far this year. And now, our stock market has succumbed.
The fascinating thing, at least to a financial geek like me, is that there is a similarity to what happened in 1998. During the mid-1990’s, emerging economies in Southeast Asia, but also Russia were in a very nasty recession. Russia defaulted on her government bonds, driving a huge hedge fund called Long Term Capital Management to the brink of bankruptcy. This fund “owned” an incredible 5 percent of the global fixed income market and would have created a very nasty problem had the Fed not intervened.
In the midst of all this turmoil, the S&P 500 plummeted 20 percent in August 1998. It bounced back a little in September. Then, it fell to new lows, finally bottoming in October.
That’s basically what’s been going on in 2015—so far. In both years, the S&P 500 was off to a good start in the 1st quarter. Then, it flattened out through most of the summer, reaching highs in July. But in August it got ugly.
The question now is what happens next? If this is a replay of 1998, the market should begin moving higher very soon. If not, look out below!