On Monday, stock markets around the world declined to their lowest levels in years. China’s economic slowdown is largely to blame, as China’s main index dropped the most since 2008 by 8.5%. Both the European Stock Exchange and the New York Stock Exchange suffered their worst trading days since 2011.
Although there was alarm at trading desks on Bay Street, it didn’t reach the panic level of 2008. Later in the day, the markets generally started their recovery, but didn’t recover the entire drop.
There have been economic challenges over the summer as there was concern over the fate of the Euro because of fiscal woes in Greece. The price of oil had tumbled with a special impact on the Canadian economy, which is so reliant on energy.
Last week, China unexpectedly devalued its currency, indicating a significant slowdown in the world’s second-largest economy. Trade with China is a driver for the strength in the global economy, so it shattered the confidence that higher interest rates in the United States would bring an end to the buoyancy.
How it will affect you
Sell-offs in financial markets doesn’t necessarily mean harm for the real economy. Domestic stock markets recover after being brought down by problems in the rest of the world; this is what is known in the business as a “correction.” Markets have been hot for a long time and now they’re cooling off. But that doesn’t mean a deep freeze. The clouds will lift, but the question is when.
It’s different for Canadians than it is for people in other parts of the world. Because we are in a recession, our reliance on energy will make the climb back up harder. While it is not a cause and effect relationship, this downturn will mean the recovery in Canada will be slower and harder.
I remember October 2008. My son looked at the statement our stockbroker had sent us and asked if we were going to have to sell our house. It was a couple of weeks after the markets fell on September 29. In the couple of weeks between the times the statement was sent out and my son picked it up, the markets had recovered. They weren’t at the levels they were at before the plunge, but they improved enough so that it didn’t feel like the end.
Everybody is affected by the stock market plunge, not just the high rollers buying derivatives on the emerging markets for their hedge funds. Most of us have a pension plan, a savings account, a mortgage, or an education fund for our children which, whether we like it or not, are influenced by the market.
Fear and panic can feed on itself, so taking a deep breath helps. Your savings are likely still safe. Your portfolio is probably a diverse mix of investments, including the equity you have in your home. So while you might want to take a peek at your investment statements, remember that they are an indication of a point in time, not the long-range future. If you believed in the fundaments of our economic system before, there is no reason to believe that those fundamentals have changed.
A lot of the reaction to financial events like today is psychological. If you become so stressed out that you can’t sleep, maybe you shouldn’t be investing in the stock market—health is as important as wealth. You might want to save by using safer investments like government bonds and GICs. (Don’t forget that we have a tool to find the best GIC rates.) But remember that the less risk you take, the lower your returns are likely to be. That’s the trade-off.
Flickr: Chung Chu