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An Easy Explanation of Why The World Is In A Panic Over The Global Stocks

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Most of the world woke up Monday morning with news that the stock market – something most of us do not understand beyond the fact that it controls our lives – had crashed.

While many of us sat scratching our heads at what the mainstream media was shouting at us about the latest “disaster”, BuzzFeed has laid the entire situation out in layman’s terms to help the rest of us understand what is happening.

BuzzFeed explains:

Now this is all kind of confusing and can be kind of technical, but bear with us here as we attempt to explain business.

Monday’s action is tied to China, the second-largest economy in the world. China’s constant growth has fueled higher prices of things like copper and oil, and its export market’s size has directly affected the movement of the global economy.

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But China has been experiencing a very rough summer, filled with the government pumping money into the system, devaluing its currency to make Chinese goods more competitive, and generally trying to stave off an economic slowdown.

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That all came to a head today in what’s being called “Black Monday.” Chinese investors sold off enough of their stocks to drive the value of China’s Shanghai Composite down more than 8% — the biggest one-day drop for the market since 2007.

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That’s had a ripple effect across the financial spectrum, affecting everything from other stock markets to currencies to commodity prices.

On the commodities side, for example, oil has already been at really low prices. China being in a likely slowdown drove the cost of a barrel of oil to under $40, which is insanely cheap.

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That in turn has lead to the Russian ruble tanking to its lowest point in seven months against the dollar and pulled the currencies of other former Soviet countries down along with it.

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And the shudder in the Chinese markets has triggered corresponding drops in other stock markets: Japan’s Nikkei 225 was down over 4%, the UK’s FTSE 100 closed down almost more than 4.5% and Europe Stoxx 600 was down more than 5%.

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The combined onslaught overseas caused the Dow Jones Industrial Average (an average of 30 major U.S. industrial companies and considered a general indicator of U.S. economic health) to open more than 1,000 points down.

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Since then, though, the Dow Jones rebounded to be only about 300-odd points down, before ending the day down 586 points.

While that’s not exactly great, given how bad things were looking when the NYSE opened, they could have been much worse. The S&P 500 (another index of U.S. companies’ prices) and the NASDAQ were also still down at market close, but it was overall a far less bloody day than was initially feared.

This all points to the U.S. market entering what’s known as a “correction” period — a time when really high stock market numbers stop going up and get brought back down to more manageable numbers. This happens every few years and we’ve all survived.

So while the U.S. market decline is sharp, it doesn’t compare to the huge crash that launched the Great Recession in 2008, as this 10-year chart of the S&P 500 shows.

 

Royce Christyn
About Royce Christyn (3467 Articles)
Documentarian, Writer, Producer, Director, Author.