The Market Collapse

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.

One response to “The Market Collapse

  1. Pingback: The Market vs. The Economy « The Everyday Economist

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