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U.S. equities experienced a brutal tumble last week after more bad news emerged from China. For the week, the S&P 500 lost 5.96%, the Dow dropped 6.19%, and the NASDAQ fell 7.26%.1
China’s ongoing economic woes are causing major turmoil in stock markets around the world. Disappointing data from China included reports that factory activity dropped for the 10th consecutive month, squashing hopes of a 2016 resurgence.2
In this week’s update, we’ve compiled a list of questions and answers to help you make sense of last week’s turmoil:
What do China’s stock market problems mean for U.S. investors?
In short: not much. China’s stock market halted twice last week when emergency “circuit breakers” kicked in to limit volatility.3 However, most U.S. investors are not directly invested in Chinese stocks and are not affected by their markets. Chinese stocks are notoriously volatile and have experienced flash crashes in the past.
Why did U.S. markets react badly to news from China?
We live in an interconnected world where information is transmitted instantly and market overreactions are common. Thursday’s selloff came after the Chinese central bank announced yet another devaluation of the yuan, adding to investor fears about the health of the world’s second-largest economy.4 The move could also spark a global currency war as other countries devalue their currencies to compete with cheaper Chinese goods.5
The question on everyone’s minds: How will China’s slowdown affect the rest of the world? Investors see weakness in China and fear how it will affect U.S. corporations and our domestic economy. With the 2016 growth picture already modest, investors are poised to react negatively to any news that seems even slightly threatening.
Should I be worried about the U.S. economy?
Probably not. China is our third-largest export market but accounts for just 0.8% of our GDP.6 While a severe slowdown in China won’t be good for global growth, the U.S. economy is on track for modest growth this year. We’ll know more about how our economy fared last quarter at the end of the month.
What we do know is that the labor market continues to improve, adding 292,000 jobs in December. October and November numbers were also revised upward, indicating that growth is sustained.7 Since domestic consumption accounts for two-thirds of U.S. economic activity, we can hope that these improvements will translate into higher consumer spending.
It’s not clear yet whether China is moving into a recession. Exports have largely fueled its past economic growth, and political leaders are struggling to wean the country off foreign demand.8 Will leaders be successful in transitioning to a more consumer-led economy? We’ll see.
What should I do as an investor?
For now, stay calm and focused on your personal goals. Regardless of what you might be hearing on the news, last week’s drop was not panic selling. Investors are caught up in global growth worries as they have been for months.
We cannot predict when markets will return to positive growth, and it’s possible that volatility and weakness may persist in the weeks to come. What we know is that historically, markets have not usually entered bear territory (sustained drops of 20% or more) unless accompanied by a recession.9 Though we cannot rule out prolonged market weakness, a severe drop would be a historical anomaly.
Fourth-quarter earnings season will move into high gear in the coming weeks and investors will have plenty of other news to digest. We are closely monitoring markets and taking a hard look at fundamental factors. If we believe that changes need to be made to your portfolio, we will contact you directly. If you have experienced any life changes or shifts in your perspectives on risk, please let us know.
As always, if you have any questions about markets or concerns about your personal situation, please give us a call.
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