How far can the stock market fall?
It’s been a bad year for US stocks, and we’re only midway through January. At one point on Wednesday, the Dow Jones industrial average was down over 500 points, and the S&P 500 down 3 percent.
Since that mid-day low, there’s been a mini-rally, but it would take a much bigger upswing to undo the near-constant losses that have been eroding wealth since Christmas.
What’s behind the turmoil? Maybe nothing, stocks are notoriously volatile, subject to all manner of runs and corrections. But this downturn isn’t just happening in the United States. It’s affecting markets around the world. And the most likely culprit is China, epicenter of an economic slowdown that is shaking the entire global economy.
What’s happening in China?
For decades now, economic growth in China has been fiery, often reaching rates above 10 percent. But those heady days of consistent, high-octane growth seem to be over.
In 2015, China’s growth rate dipped below 7 percent, and recent figures from the all-important manufacturing sector suggest that things aren’t about to return to the highs. In fact, things may be even worse than the official numbers suggest; a recent independent analysis found that the true unemployment rate in China may be nearly three times the official rate.
Countries with deep ties to China are likely to be dragged down. That includes regional trading partners, like Japan, Korea, and Australia, as well as some farther-flung countries, like Brazil, which have built huge industries focused on selling commodities and raw materials to China, industries which now seem endangered.
Less clear is whether a Chinese slowdown will shake the US economy as well. True, there are US companies that will have to rethink plans to market to a no-longer-thriving Chinese middle class. But if troubles in China bring lower-cost imports and ever-cheaper gasoline, that could help offset the damage.
Then again, there are economists who worry that a recession in China could trigger a global recession. For instance, if the already strong dollar is forced up even further, that could widen the trade gap in a way that dampens US job creation and keeps wages from growing.
How common are big swings in the stock market?
Increasingly common. In the 1970s, there were fewer than 60 occasions when the S&P index moved more than 2 percent. In the 1980s, there were 109. Over the last decade, there have been 208 such occasions, or about 20 each year.
So if the markets have seemed especially volatile these past few days, that’s partly because every month is more volatile than it used to be.
What happens next?
New information emerges, traders respond, and the stock market keeps on moving. That much is easy to predict. Figuring out whether it will move up or down, that’s the real challenge.
If you’re an optimist, hold tight to the fact that market movements can be driven by emotion, and that fear may be forcing markets down, not fundamentals.
Then again, it’s possible to look at the fundamentals and become a pessimist. The risks for China’s future are real, as is the chance that they spread to the United States.
More from Evan Horowitz: