Two weeks ago, the Chinese stock markets lost more than a tenth of their value. Following a currency devaluation, decreased manufacturing activity, and hints of decreasing consumer demand, the Shanghai Composite fell by11%, the Hang Seng Index in Hong Kong closed at 20% below its high point, and the Shenzen Composite dropped 11.5% – astonishing numbers, given that stocks can only fall 10% in a single day.
Last Monday, the US stock exchanges plunged. Within the first minute of trading, the Dow went down 1,000 points. Stocks were being sold off at a higher rates than at any time since the Great Depression. Conditions persisted through the next few days. In one hour on Tuesday, the Dow dropped 500 points. Related markets experienced similar downturns. The S&P 500 plunged 12.35%. In just about three hours on Monday, the Stoxx Europe 600 index dropped by more than 4%. News outlets breathlessly reported the damage, Donald Trump tweeted grumpy “I told you so”s about China ruining America’s economy, and more Americans Googled the term “stock market crash” than at any time since 2008.
Wednesday afternoon, the markets rebounded. From its (eerie) nadir of 15,666 on Tuesday afternoon, the Dow finished trading Wednesday at 16,286. Then, it jumped more than 200 points at the start of trading Thursday. The Dow finished the week at 16,643, which was actually a 1.1% increase from the end of trading the previous week. The S&P went up .9% and Stoxx Europe rose .6% for the week. But the media (other than the outlets that always report on the markets), left the market bouncing back largely unmentioned.
It makes sense that the market dramatically bottoming out would get more attention than the market’s steady rebound. Given the events of the last decade, people are understandably skittish about any signs of economic trouble. Last week, that was compounded with anxieties about our interconnectedness with the Chinese economy, which has been showing hints of slowing down since at least 2013.
But it’s hard to say what affect the momentary crisis should have on business decision-making, if any. The relationship between the market and the strength of the economy as a whole is, as ever, cloudy. When the economy is undeniably booming, the markets go up; when the economy is depressed, the markets go down. Between these poles, though, attempts to draw conclusions from daily trading usually just reinforce an analysts’ established outlook on the economy.
Albert Edwards, economist at Societe Generale, has been warning for several months that we’re on the precipice of another global financial crisis similar to 2007-2008. Using a model based on the profitability of S&P companies, he estimates that there’s a 99.7% chance of an impending bear market. According to him, the events of Monday and Tuesday were just one more piece of corroborating evidence for his gloomy predictions.
More optimistic observers saw this as just a momentary slide. Fundstrat’s Tom Lee wrote a note to clients on Friday arguing that we’re in the midst of a bull market that promises to continue for the indefinite future. Goldman Sachs sent a note to clients saying “We continue to believe that global economic fundamentals are strong, even as the markets appear to be repricing.” Along those lines, recent GDP numbers were revised to estimate 3.7% annual growth, unemployment is consistently around 5.3%, and wages are picking up. Basically every sector of the economy is growing, beside energy (though that’s largely because of low fuel prices, which are themselves helping the other sectors).
Though the markets’ recovery does argue against the starkest visions of impending doom, it doesn’t necessarily prove the optimists conclusively right (just as the fall didn’t fully vindicate the pessimists). No single piece of evidence could. Indeed, there’s a contingent that sees daily swings in the market as completely untethered from the economy as a whole, its ups and downs related more to mere gambling fads than the actual health of the economy. As time goes on, this idea only grows in popularity (to the consternation of the people who report on the stock market).
At the very least, the last week has shown the silliness of making long-term business decisions based on short-term stock market feedback. Whatever hiring moves you were planning to make last Sunday should be unaffected by last week’s downturn.
