The summer of volatile stock prices

 •  Filed under China, finance

Reading some of the reactions of the commentariat on Tuesday, August 25th, it was hard not to wince.

Nobody knew why "the stock market had a bad day" but three things were everywhere:

  1. Random stories about the "reasons".
  2. Predictions of doom, either stated directly or communicated through images.
  3. Recommendations to policy makers, or claims about the power of people and institutions to tame markets.

An example of the rhetorical device #3: someone was quoted in the NYT saying that "everything is going to be dictated by government policy":


This type of noisy reactions was predictably supplemented with supposed explanations of what is 'wrong with China' ("its authoritarian command and control economic governance is to blame" - source: NYT). You can always expect this type of lecture: 'if only China had a political system we approve of, it would grow faster!'.

Opinions (even if self-centered) are fine - though it's not clear to me that this ought to count as journalism.

Turning to informative reactions

I enjoyed this piece from Nicholas Lardy:

Rather than a financial and economic meltdown, China is experiencing an overdue correction in its equity market...

... Even at Tuesday’s much lower prices, the Shenzhen market was trading at a still-lofty 39 times earnings. While not as overpriced, American equities before last week had experienced a six-year bull market without a correction. ...

... The perception that China’s growth was slowing drove commodity prices to new lows, further weakening emerging markets such as Brazil and Chile that are big commodity exporters, and eventually driving down American equities sharply. But if China hadn’t been the catalyst for the correction in American markets, it most likely would have been something else.

Lardy concludes:

Despite what many think, not all debt is the same, nor are all equity market slides. There have been many more corrections in both the United States and China than there have been financial crises. Allowing those corrections to take place is part of letting markets determine outcomes, which is a good thing.

Wolf: Chinese authorities have 3 headaches:

The first is cleaning up the legacy of past financial excesses while avoiding a financial crisis. The second is reshaping the economy, so that it is more dependent on private and public consumption and less dependent on extraordinarily high levels of investment. The third is achieving all that while sustaining dynamic growth of aggregate demand. (FT)

Eye-opening datapoint: 40+ million stock trading accounts were opened between June 2014 and May 2015 (Vox).

Finally, I liked how Matthew Yglesias started his article ("The truth is that nobody has any idea what causes short-term stock market fluctuations. And to the extent that anyone even thinks they have a way of finding out, they're not going to tell you about it or blab to the press — they're going to trade and make money.") and how Justin Wolfers explained that if you have short horizons, you're hurting only yourself:

Over time, the stock market has risen enormously, but if you zoom in to the daily ups and downs, it’s easy to lose sight of these long-run gains. Since the Standard & Poor’s 500 index’s creation in March 1957, it has fallen on 46.7 percent of all trading days. At the daily level, the stock market can seem like a roller coaster. ...

... checking your portfolio weekly reduces the number of times you confront a loss, from 46.7 percent to 43.7 percent. Be more disciplined and check at the end of each month, and you realize losses only 40.4 percent of the time. And if you check your portfolio at the end of each year instead, you would have to deal with losses only 27.6 percent of the time.