The market craziness continues, with stocks down, commodities crashing, and bond yields rising. As usual during such periods, wild theories about what’s happening abound: The U.S. recovery is a mirage; China is having a Lehman Brothers-style meltdown; etc.
Here are four things you need to know about what’s really going on.
- The next few days and weeks will be a mad market scramble that doesn’t reflect what’s happening in the underlying economy. The Fed’s recent announcement that it will start scaling back asset purchases has sent everyone scurrying to get rid of riskier assets or assets that are perceived to be dependent on quantitative easing (emerging market stocks, hot-money commodity plays, any companies that are particularly sensitive to interest rates). Hold tight – we’re in for a summer of volatility but the underlying global growth story hasn’t changed that much.
- To that effect – the U.S. is still the prettiest house on the ugly block that is the global economy. Global growth is slowing down, no doubt (see my next point on China). Emerging markets are more volatile, and Europe is in recession. But the U.S. still looks good by comparison – so the markets may stabilize here before they do elsewhere.
- China is slowing, but as I wrote last week, it’s not having a Lehman Brothers moment. Yes, China is having a rough moment, but let’s keep in mind that banks not giving out more credit right now is actually a sign that the Chinese government is willing to accept some short term pain to have longer term economic rebalancing. Not a bad thing.
- Pay attention to what happens to real short-term interest rates. The risk now is that the markets confuse the Fed’s tapering of its asset buying program with it actually raising interest rates — and that creates tighter economic conditions that derail recovery.
(MORE: Bernanke Says Little, Market Plummets: Welcome to the Post-QE Economy)