China Stumbles, Markets Tumble

Will the Volatility Continue?

The Economist called it “a snort from a dragon’s nostrils.” At the end of February, as China’s stock market index fell by more than 8%, stock markets tumbled around the globe — it was their steepest decline since the September 11 attacks in 2001. The Dow Jones Industrial Average dropped more than 500 points in a single afternoon.

In addition to worries about China, concerns about a possible shakeout in the U.S. sub-prime mortgage market contributed to the anxiety. And to add to the gloom, Alan Greenspan, former chairman of the Federal Reserve, commented that the U.S. economy could face a recession. In the week that has gone by, volatility has continued — markets have recovered, only to drop again, and then climb once more.

What is causing this volatility, and what does it mean for investors? Knowledge@Wharton discussed this question with Jeremy Siegel, a professor of finance at Wharton and author of Stocks for the Long Run and The Future for Investors. Next, they spoke with Wharton management professor Marshall Meyer, who closely follows China’s economy.

Continue reading China Stumbles, Markets Tumble

China Stumbles, Markets Tumble

Chinese stock bubble of 2007

From Wikipedia, the free encyclopedia

The Chinese Correction (simplified Chinese: 中国校正; traditional Chinese: 中國校正; pinyin: Zhōngguó xiàozhèng) was the global stock market plunge of February 27, 2007 which wiped out hundreds of billions of market value. After rumors that governmental Chinese economic authorities were going to raise interest rates in an attempt to curb inflation and that they planned to clamp down on speculative trading with borrowed money, the SSE Composite Index of the Shanghai Stock Exchange tumbled 9%, the largest drop in 10 years.

The plunge in Asian markets sent ripples through the global market as the world reacted to the 9% meltdown in the Chinese stock market. The Chinese Correction triggered drops and major unease in nearly all financial markets around the world.

After the Chinese market drop, the Dow Jones Industrial Average in the United States dropped a staggering 416 points, or 3.29% from 12,632 to 12,216 amid fears for growth prospects, then the biggest one-day slide since the September 11, 2001 terrorist attacks. The S&P 500 saw an even more catastrophic 3.45% slide. Sell orders were made so fast that an additional analysis computer had to be used, causing an instantaneous 200 point drop at one point in the Dow Industrials.

Photo credit: tonynetone via Visual hunt / CC BY