As you already know, the market just hit a pocket of fierce turbulence that’s sending investors into panic mode. In the past few hours since the market opened today, we’ve seen Apple back up $100 and many others trending back to their last closing price.
All three major U.S. market indexes hit correction territory and the S&P 500 is seeing one of the worst weeks since 2011.
So what exactly is the cause of this intense sell off?
First and foremost, the US market has looked resilient over the past few years. But the truth is that the market has stalled and hasn’t hit new highs in almost a year. There were times where many investors thought there would be a break out, but they were wrong.
Russia and Brazil are Struggling
Meanwhile, emerging economies have been falling through the floor. Russia has fallen into a deep recession, as a crash in energy prices has pummeled its oil-driven economy and the turmoil in the Ukraine has contributed to volatility.
Brazil, which was expected to see a turnaround in its flailing economy after the 2014 World Cup, has more than its own share of economic woes. After the implosion of Eike Batista’s fortune (once the 7th richest person on Earth) and the collapse of the state-run oil giant Petrobras, the largest South American economy has been experiencing negative GDP growth when accounting for inflation.
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As investors flee these economies’ markets and move to the US stock market, their currencies lose value. Brazil’s Real is near an all time low and Russia’s Ruble has spiraled out of control. Not a pretty picture for the global economy.
And then there’s China…
China’s economy has been cooling off since 2010 and its economic growth rate is almost half of what it was at its peak. So the government has been doing everything it can to keep the economy afloat, including its own version of QE (a move to float the markets by acting as a buyer) and now devaluing the Yuan. This move was completely unprecendented and shocked the markets because of its implications. China’s weakening of the Yuan was a move to help its economy. A weaker currency means that it’s cheaper to buy goods from China but this doesn’t help other competing economies. Indonesia, Thailand, and Philippine currencies have all fallen dramatically in response and their respective stock markets are now in bear market territory.
Fed Getting Ready to Raise Rates
The US Federal Reserve has been signaling that it will raise rates slightly higher as early as September. This would make it more attractive to move money to the US to take advantage of higher yields. This anicipating is yet another blow to global markets that are now in a downward spiral.
The US markets are now crashing in response. As global markets continue to fall, it’s not unlikely that global economic forecasts would be trimmed for the second half of the year and 2016. This re-adjustment of expectations would cause investors to re-evaluate their investments, even in the US stock market which depends increasingly on the global economy. Wall Street juggernauts like Apple, Netflix, and Facebook which increasingly rely on global growth could see a tapering in expectations.
But if history teaches us one lesson, it’s that these are the best times to not panic. Here are a few tips:
- Don’t check your portfolio until the market closes
- Invest in stocks that you understand
- Don’t rush into a buy
- Don’t Panic