Big Picture: Market Jitters and Mid-Term Economic Risk
For U.S. investors, events since the meltdown have highlighted the riskier side of their economy. The stock market has been so stable in the past few years that the global drop came as a rude shock. Investors were once again reminded that stocks always contain some element of risk and that stability is never guaranteed. For that reason the sub-prime market (and in some cases the diversified mortgage market) has many investors worried these problems will extend to the broader financial markets. This scenario tends to push risk-averse investors away from more volatile sectors, causing technology stocks to suffer.
Perhaps the biggest question in the coming months is whether technology stocks are dependent on a strong economy; it is not entirely clear that they do. Jitters extended from CompUSA’s store closings to Circuit City’s restructuring. This highlights emerging consumer sentiment favoring performers with corporate stability and a dislike for underachievers or “restructurers.” In effect, underperformers are the new barometers signifying market potential, which elicits a more conservative approach by investors.
The China quandary remains a major concern, due largely to the deliberate and well-planned market drops on the Shanghai and Shenzhen Composite indexes. The Chinese government has been preoccupied with the level of investment in its economy and the amount of subsidized capital from state banks. That subsidized capital was used in launching numerous non-performing companies. Some of those non-performers then floated their own shares or used them as collateral for new loans. These trends ended up playing havoc with commodities. The implications of such an overextension include a flood of Chinese products on foreign markets.
Because the levels of foreign integration with the Chinese economic system are extreme, anything China does could be felt worldwide. It also appears that the markets have a bit farther to fall in China before they correct. The trick for the Chinese is to prevent further corrections from impacting foreign markets, as they did last time.