Market events with several hundred points drops sometimes earn a name. The October crash of 1987 is Black Monday. The 1000 point fluctuation in May 2010 was the Flash Crash. I wonder what today’s sickening drop will be called? The “China syndrome” perhaps? Actually, that’s not a bad idea. The China Syndrome originally referred to a Chernobyl-like nuclear disaster with a malfunctioning melting core that could bore a hole through the earth’s crust, “all the way to China”. The nuclear incident is only figurative; it’s not literally referring to China. In today’s market event, China really is the epicenter of the corrective repricing. We’ve spent a few blog posts talking about what’s going on in China, with the currency repricing and the strong suspicions that the country is in worse economic shape than the political oligarchy will admit to. It is bad, but it just isn’t a calamity. Even if it’s true that the Chinese government has been woefully misrepresenting it’s economic strength and things are much worse off, the market reaction to that event is logical and predictable, based on an adjustment of market expectations to economic truth. Ideally, China will learn to become more transparent with its economic system, thus preventing future boom-and-bust cycles like this, but this reaction is still ultimately necessary.
For US investors, today’s wild ride is spooky, but keep the whole year’s returns in context. There are a few weak spots – commodities and emerging market stocks are down more 10% each – but most indices are within a few percentage points of zero through last Friday. In other words, the year-to-date returns for most balanced investors – should be flat or a slightly negative. After 6 years of a straight up bull market, that’s still a healthy position.