Here's a simple explanation for what just happened to the stock market


Myles Udland, Sam Ro, John Garber BI Markets

Business Insider

The BI Markets team!

Global markets are making a woooooooooooshing sound this morning as everything tanks.


Why is this happening, and should you be worried?

Well, I talked to our Markets team. They are inarguably the smartest, best people covering markets in the world.

Here's what I can tell you.

In terms of worry, that's really up to you, what you do for a living, where you live, and your general disposition.

In general, it's not yet time to panic. The overall US economy is still sound. The housing market is pretty strong. We continue to add jobs. Our economy is growing, albeit at a slow (but steady!) rate.


So, what's going on?

There's always a variety of factors involved global markets, but the main thing people are looking at is China.

Starting in mid-June, China's stock market, the Shanghai Composite, started tanking and is down ~40% from its peak.

China has tried, in multiple ways, to prop up its stock market. None of it has worked.

Then in August, China devalued its currency, the yuan.

If talk about the yuan makes you want to fall asleep, I don't blame you.


But, in short: The US dollar was getting strong relative to the yuan, which was making China's exports more expensive. That was risky for an economy that was already slowing down and missing expectations. So to make its exports cheaper, China moved to make the yuan cheaper.

China's tinkering with markets freaked investors out, with the readthrough being that if the government has to take unprecedented, extraordinary measures, it usually means things are really bad. Or at least worse than the Chinese government was letting on.

What else?

There's also a looming fear that the Federal Reserve is ready to raise interest rates for the first time since July 2006.

This is more boring talk, but basically the Fed has kept interest rates at 0% since the financial crisis. The idea with keeping interest rates low was to encourage investors to borrow money cheaply and invest in stuff - people, equipment, new buildings, new businesses altogether - thus stimulating the economy. The Fed can't (and in the view of many shouldn't) do that forever.

As the economy has gotten better in the last few years, it looked like the Fed was ready to raise rates and markets had been targeting the September 16-17 Fed meeting as the time for "it" to happen.


This is theoretically sending a small tremor through the markets as people prepare for a new world with ever-so-slightly higher interest rates.

Then why is our market going down so hard?

There's no easy answer here!

If China is going soft, then the concern is that emerging markets are also going soft, which could limit earnings growth for companies.

Earnings growth generally has gone sideways lately, so the last thing companies need are big emerging markets to weaken.

But most simply, investors are spooked and selling... which is leading to more selling. Do you want to buy stocks when everything in the world is tanking?


The big picture!

If you're the kind of person that likes to worry, then go nuts and freak out. (And read Henry Blodget's latest post!)

But in the big picture this is just a blip. Your retirement savings are fine. For now.


Yahoo Finance

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