CHINA’S BLACK MON­DAY: LESSONS FOR IN­VESTORS

Finweek English Edition - - FRONT PAGE - BY KEITH PIL­BEAM

GRAPH 1: MONTHLY MOVE­MENTS IN THE S&P 500 IN­DEX FROM FE­BRU­ARY 2009

Stock mar­kets all over the world fol­lowed China’s lead on 24 Au­gust, plung­ing into the red and wip­ing hun­dreds of bil­lions of dol­lars off of share val­ues. But, while it’s tempt­ing to lay the blame en­tirely at China’s door, a look at the global econ­omy and mar­kets shows Western mar­kets have been over­val­ued and were due a cor­rec­tion.

Eq­ui­ties are risky as­sets and do not go up for­ever in straight lines, so cor­rec­tions can be fast and fu­ri­ous at times. This acts as a use­ful re­minder to in­vestors that stocks are risky as­sets.

Stock mar­kets in re­cent years have ben­e­fit­ted from mar­ket-friendly mon­e­tary poli­cies. There have been three rounds of quan­ti­ta­tive eas­ing from the Fed­eral Re­serve, the Bank of Ja­pan and more re­cently the Euro­pean Cen­tral Bank. For some time there have been con­cerns about the out­ra­geous val­u­a­tion of shares of cer­tain US com­pa­nies, i nclud­ing Face­book, Twit­ter, Tesla, GoPro, Net­flix and Ama­zon. Both short-term and longterm in­ter­est rates glob­ally have been ar­ti­fi­cially low for record pe­ri­ods. This un­usual era of money print­ing and low in­ter­est rates has boosted as­set prices – not just stocks, but also prop­erty prices in ma­jor towns and cities around the globe.

More in­ter­est­ingly, un­til this cor­rec­tion, the cur­rent bull mar­ket has been ex­tremely un­usual in that it has been one of the long­est ever pe­ri­ods recorded (48 months) with­out a 10% cor­rec­tion in the S&P 500 in­dex. The blue can­dles in graph 1 show the in­dex be­ing up for the month; red can­dles rep­re­sent it down for the month. The pre­vi­ous long­est pe­ri­ods were Oc­to­ber 1990 – Oc­to­ber 1997 (84 months) and March 2003 – Oc­to­ber 2007 (54 months). The large red can­dle at the end rep­re­sents the most re­cent drop.

Another sign that US stocks had

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