Black Monday,
2015
Introduction
For more than two decades, China
has been well contributing to economic growth and low global inflation. But we
witnessed one of the worst day’s trading in many years- 24th August, 2015. Did
it signal the start of a new and alarming phase of the crisis which began some
eight years ago? This is the time to discuss, if the world is entering a period
like the Asian financial crisis of 1997 or the worldwide slowdown of 2008.
And still, that day’s losses were
not among the worst losses in market history.
Short summary, of what
happened that day
On Monday, the stock market
posted its largest decline in years, sparking fear that the US is on the verge
of another recession. After initially plunging 6.4 percent in a matter of
minutes, it recovered some ground and ended the day down 3.6 percent.
•
The US stock market suffered
its biggest sell-off in four years.
•
The S&P 500 and NASDAQ
went down 10% on their recent peaks.
•
In London, almost £74bn was
wiped off the value of the FTSE 100 index, in a rout led by mining giants.
•
European stock markets
suffered their worst days trading since 2011.
•
The selloff began in Asia,
where Australia’s market suffered its biggest fall since 2009 and Japan’s
Nikkei slumped over 4%.
•
But China was the worst
hit, with the Shanghai composite index dropping 8.5% in the biggest selloff
since 2007.
Message from the Stock
Market
1. The global debt crisis of 2008 didn’t go away—rather just moved
to China. When American consumers stopped buying stuff after the subprime
crisis, China tried to take up the slack, that meant a major run up in debt,
and a couple of years ago, that bubble started to burst.
2. A slowdown in China is now a much bigger deal than it used to
be.
3. This isn’t a disaster for the US, but it’s not good. U.S.
companies aren’t as exposed to China as many emerging market countries. A fall
in Shanghai isn’t going to push the U.S. market back into recession, assuming
that US’s recovery continues at the current pace.
4. The world is still waiting for a true fix to the financial
crisis of 2008.
Root Cause Analysis
In the year leading up to the
crash, individual investors continued to invest mass amounts in stocks and inflate
the stock market bubble through, thereby, exceeding the economic growth rate
and profits of the companies they were investing in. Investors faced margin
calls on their stocks and many were forced to sell off shares in droves,
precipitating the crash.
By 8–9 July 2015, the Shanghai
stock market had fallen 30 percent over three weeks as 1,400 companies, or more
than half listed, filed for a trading halt in an attempt to prevent further
losses. Values of Chinese stock markets continued to drop despite efforts by
the government to reduce the fall. After three stable weeks the Shanghai index
fell again on 27 July by 8.5 percent, marking the largest fall since 2007.
Global companies that relied on the Chinese market suffered from the crash.
On August 24th, the Shanghai main
share index lost another 8.49%. As a result, billions of pounds have been lost
on international stock markets with some international commentators labelling
the day 2015- Black Monday.
There are many reasons why world
stocks went down that day, but the dreaded question is- Why central bankers couldn’t
prevent such a major crash? How could panic spread so easily and swiftly, from
Shanghai and Shenzhen to London and New York?
History
October 19, 1987, the darkest day
in Stock Market history, when the stock market plunged by 22 percent. This huge
drop wasn't followed by a recession, and the market recovered the lost ground
within two years. There were big declines in October 1997 and August 1998.
Again, these proved not to have any broader significance, as the bull market
would continue until 2000.
There were three big drops during
the 2000-'01 bear market that preceded the recession of the early George W.
Bush years. The stock market suffered 11 big drops in the last four months of
2008, during the Great Recession that began in 2007.
In August 2011, the stock market suffered
three big declines. So sometimes a big stock market decline is a sign of deeper
economic problems. And sometimes, it's not. So, it's way too early to say which
category Monday's crash falls under.
Significance
Even when the stock markets are
in full correction mode, the reversal is short-lived. In late September, 2014
over the span of three weeks, the NASDAQ and NYSE were both correcting themselves,
but both markets rebounded in short order, and filled investors with optimism.
But still, the fact is that a large number of important indicators indicate
that another stock market crash for US, in 2015, might be on the way.
Effects
Since the stock market crashed in
2008, U.S. economic growth has been inconsistent.
America’s ability to carry the
global economy on its own, off course, is limited, and this is something,
Investors should understand. The situation reminds me of John Templeton, who
once said, “Bull markets are born on pessimism, grow on scepticism, mature on
optimism and die on euphoria.”
Near Future - More Stock
Market Crashes?
In 2015, businesses and investors
will pay the price for their addiction to artificially low interest rates.
To overcome the recession, in
November 2008, the Federal Reserve artificially lowered the short-term lending
rate to nearly zero to make banks lend more money to businesses and people. The
ultra-low-interest-rate environment made it cheaper to borrow money and as a fuel
propelled the stock market higher. But later, raising interest rates by just 50
basis points could have a serious, negative impact on the broader economy and,
by extension, the U.S. stock market. Continued economic challenges in the
Eurozone and Asia, geopolitical tensions between Russia, Ukraine, and the
entire Eurozone; issues between U.S. and Russia; China and U.S; and China and
Japan, accompanied by high underemployment, stagnant wages, and high debt will also
have a detrimental effect on the U.S. stock market. Yes, it’s going to be
tough. These factors will push the U.S. stock market back onto the brink of a
stock market crash in 2015.
Now what?
“In the last few years, this is
the fifth or sixth panic condition, China encountered. And still, it was only
in 2008-09, China suffered a major economic slow period.”
“Corporate profit and economic
growth are rising at a modest rate and no dramatic rise in interest rates. So,
bargain hunters will return and buy stocks at lower prices!!”
** Reference –
