The Silver Lining Behind Black Monday’s Stock Market Plunge
#blackmonday

The Silver Lining Behind Black Monday’s Stock Market Plunge

Brendan McDermid

The stock market opened with a thud Monday, with the Dow Jones Industrial Average quickly dropping more than 1,000 points and the S&P 500 selloff briefly reaching correction territory, more than 10 percent off its peak. But by midday, #BlackMonday had brightened to a pale shade of gray, as the major indices began to claw their way back.

Still, if the turbulent trading of recent days has you nervous, here’s some good news to keep in mind: The sharp selloff hasn’t been prompted by some sudden worsening of the economic picture in the U.S. The market’s dive was set off by fears about China’s slowing economy and, to a lesser extent, by a seemingly imminent move by the Federal Reserve to raise interest rates for the first time since 2006. But while a slowdown in China’s economic engine could still have global ramifications, the fundamental outlook for the U.S. hasn’t changed.

“The current panic is essentially ‘made in China,’” Julian Jessop, chief global economist at Capital Economics, wrote in a note to clients Monday. “The recent data from other major economies have generally been good and there is little to justify fears of a major global downturn.”

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GDP data due out next week could push the second-quarter growth rate above 3 percent, economists at Credit Suisse noted late last week, bringing the annual growth rate for the first six months of the year close to 2 percent, or just about what it’s been in recent years. Falling energy prices and a recovering job market should — should — buoy consumer spending. “These conditions are likely to remain in place, and energy investment is unlikely to fall sharply again, despite still falling oil prices,” wrote the Credit Suisse analysts, who still expect second half GDP to grow at about 3 percent.

The fears of economic fallout in China may be overblown, too, Capital Economics’ Jessop says. The Chinese government has pulled back from propping up its stock market, but that primarily affects what UniCredit Global Chief Economist Erik F. Nielsen calls a “minuscule share of Chinese households” invested in the market. “This is good news, not bad news, for everyone but those specific households — and as a share of total-China they hardly count,” Nielsen wrote Monday. “Therefore, the feedback loop from markets to the real economy in China is virtually non-existent because the stock market is so small compared to the economy.” Even those Chinese households invested in stocks haven’t necessarily been slammed; the crash in the Shanghai composite index has simply taken it back just below where it started the year.

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Similarly, fears about the Chinese slowdown might also be inflated. “The balance of the latest ‘real’ data out of China suggests a slight acceleration of growth in domestic demand again — not a decline,” Nielsen says. Even if growth is still sluggish, the economic data out of China “are not weak enough to justify fears of a ‘hard landing,’” Jessop says. China’s contribution to global demand has stayed steady. “A shift to slower but more sustainable growth in China – particularly if it is less dependent on commodity-intensive investment and on exports – could leave the rest of the world better off.”

The economists also add that plunging commodity prices are more the product of increased supply rather than falling demand — and that those falling prices should benefit the global economy, on the whole. “Lower commodity prices is great news for Europe (and, to a lesser extent, the U.S.): It’s like a massive tax cut for non-commodity businesses and households — with no fiscal impact! I love it!” Nielsen wrote, exclamation points and all.

None of that is to suggest that the Chinese, U.S. or global economies will all just sail ahead without any additional turbulence. But the intensity of the market’s recent moves may be misleading if read as an economic forecast. “It feels like a severe episode of market hypochondria,” Nielsen says. “Not easy to cure, but a few deep breaths and a long walk might help. Panic certainly doesn't!”

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