Stock Market Sell-off: Tremor or Quake?
Things are getting interesting on Wall Street. No doubt, today's market sell-off is jarring to investors, especially since market volatility has been mild in recent years.
But this type of sell-off can be welcome news on Wall Street. Why? The stock market rarely goes straight up. Bull market rallies are usually peppered with minor sell-offs and corrections that give investors time to rest–and re-enter the market at attractive prices.
Think of market sell-offs as sort of like earthquakes. It's always better to have dozens of minor tremors throughout the year to alleviate pressure rather than have pressure build up to the point where a big quake hits.
Yet Wall Street has not seen a 10 percent market sell-off since the end of the bear market in October 2002.
The question is: Now that the Dow Jones industrial average is off considerably today–it was down more than 500 points at one point in late trading, representing the biggest one-day decline since the bear market–is the market moving down too fast? In other words, is this a tiny tremor that alleviates market pressure, or could this be the start of the big one?
Right now, many believe it's still just a tremor. Of course, all eyes will be on the stock market over the next few days.
Investors clearly were using the confluence of three events–the 9 percent slide in the Chinese stock market; rising oil prices that are now back above $61 a barrel; and a disappointing durable-goods report–to start taking some profits off the table.
Of the three, China is the biggest wild card.
Joseph Quinlan, chief market strategist of global wealth and investment management at Bank of America, notes that "China's market downturn comes at a time when U.S. investors have never been more exposed to the emerging markets." This is particularly true of investing in China. Last year, U.S. investments in Chinese stocks rose to $5.2 billion, up from $4.9 billion in 2005. "That represents a sea change from prior years," Quinlan says.
Bob Doll, global chief investment officer of equities at BlackRock, says that "the market downturn in China is primarily a local event, and we do not expect that this decline will have a widespread, long-term impact across the globe."
However, "we have been indicating for some time that investors have enjoyed many months of gains in stock markets and that the global equity markets may be due for some sort of near-term pullback, consolidation, or correction," Doll says. "We believe the China downturn, combined with some high-profile problems in the subprime mortgage market, may turn out to be the catalyst for such an event."