What a difference one week makes. The S&P 500 was already seen as losing its momentum in June as the index slowly started rounding off and advances were smaller. Yet after just three trading days from August 20, investors were already wondering if this is the start of the next bear market.
The Chinese stock market and its China Shanghai Composite Index are undulating due to stress from several sources. Since China is a major economy now, more weight has to be given to its influence on the global economy. And so it has because the ongoing bear market in China reached over and clawed the U.S. market for a total 10.3% fall with the close of Tuesday.
As soon as the market falls heavily, people's minds recall previous bear markets. Are we in for another 2008?
To me, this is simply a correction like in 1998, so investors are better off picking up the bargains Mr. Market has thrown out.
A 2008 bear? No, the financial markets aren't in disarray as they were then. The stock market's relative valuation may be in the overbought range, but the financial markets aren't overheated, needing the Fed to tighten the screws to control inflation and "irrational exuberance". To the contrary, the Fed may have to postpone raising rates just to keep the drip feed of money in the market going. At this point 2008 doesn't resemble current conditions on the most part.
Also, what made 2008 and the subsequent Global Financial Crisis so much worse was the U.S. sold residential backed mortgage securities into other major markets. Effectively, the financial weakness and fragility built into the leveraged securities were exported, causing maximum spread of collateral damage outside of the U.S. The consequences of those credit and liquidity implosions are still reverberating throughout the system.
1998 had elements in the domestic market sending the U.S. stock market down, but the origins were coming from overseas, so that is at least is similar to the current China woes. The Asian Financial Crisis had just occurred in 1997, weakening foreign trade and stock exchanges in the region. It started in July and threatened to bleed into international markets.
What did the U.S. stock market do? The S&P 500 rallied upwards until the 1998 correction happened. The Russian currency default had probably a more direct influence on the U.S. because of high leverage that collapsed when the currency bets soured. Long-Term Capital Management was a big offender then, scaring the market with a potentially rolling financial market threat caused by the dizzying leverage that blew up in their face.
Still, the 1998 correction was about 20% from top to lowest point, and then the bull market rebounded and resumed its climb from there. The S&P 500 rolled over eventually in August 2000, a little less than two years later. I see this current correction simply as that- a correction. It may go a little further, but it is most likely to turn back up in a relatively short time. That's why it is a buying opportunity in stocks like a 15% discount sale in a supermarket.
I don't think the present China meltdown will have any more of an effect on the U.S. market than just a cyclical correction in a bull market.
For one, it is emanating from a foreign country, yet doesn't have the whole Asian region burning. Other Asian countries will be affected, but many of them are quickly developing now with their own economic strength. If we have Asian Financial Crisis 2, that could be a different story. China isn't selling U.S. investors dud financial securities to pad its financial markets, so whatever happens in Shanghai stays in Shanghai.
The U.S. is a major trade partner with China, yet the trade deficit is clearly on the U.S. side. The U.S. is more of a customer of China than China is of the U.S. The strong dollar makes that even worse, raising the relative price of U.S. goods. If China was importing much more U.S. goods, and things went pear-shaped there, then the U.S. would feel it more, like customers suddenly not going to a store as much.
Also, as much as China has grown economically, it is still not yet the same size as the U.S. as measured by the IMF and World Bank figures showing China at 59% of the U.S. GDP. Yes, China will affect the U.S. if it has an internal bear market and slumping economy, but you can't really call an economy that is still growing at 5%-7% annually "slumping". It is moderating, and the world just has to get use to that.
I don't believe at this stage there will be a U.S. bear market caused by what is going on it China. The vacuous froth of the China stock market is just being blown away, revealing where the real level lies.
Exports will be affected, international financial markets will rock like a boat, but right now the U.S. is in need of a correction, and we got it. It's better to be out looking for bargains in the stock market rather than doomsday scenarios. And if the U.S. market turns down a little more, the juicier the bargains will be.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.