Everywhere I look and everything I hear suggests that the huge market sell-off today is because of the fall in China’s stock markets. I have a hard time believing that this is the case and — finally — I am not alone. David Gaffen of WSJ’s MarketBeat writes:
This isn’t just China, folks. Every major index, at one point, had lost at least 4%, and the Dow industrials jumped from a 260-point decline to a 460-point decline in the blink of an eye.
He also highlights a quote from our friend Barry Ritholtz:
“If you want to believe that some bureaucrat in China changing the margin requirements for local speculators as the cause of the US selloff, then go ahead,” says Barry Ritholtz, in a comment today. “Me? I prefer to believe what is right before my eyes: Decaying economic fundamentals, a complacent market that is overbought and way overdue for a correction.
Barry has more excellent analysis here.
I think that Barry is dead-on, but I would add something else. Growth is slowing — not in my mind towards a recession, but slowing nevertheless. In addition, inflation is higher than the Fed would like it to be. These two factors are at odds. The uncertainty regarding the Fed only led to a greater uncertainty in the market and thus extended the sell-off (to some degree).
Critics will argue that the Fed Funds futures contracts headed higher, estimating that there is around a 68% chance of a rate cut, and thus the market does have an idea about the Fed. This increase, in my mind, is a byproduct of the selling rather than a forecast. I will be interested to see where this probability settles in the coming days.
Nevertheless, the fact remains, the cause of the decline was not China.