Why Fears of a China Slowdown Sank the Dow Today

The Dow Jones Industrial Average is down nearly 240 points today and the biggest reason is fear of a Chinese slowdown. Here's why China is important and why you should keep an eye on it long term.

Mar 13, 2014 at 3:30PM
Longview

It's amazing how fast the market can sell off on little more than fear, but that's the case today as the Dow Jones Industrial Average (DJINDICES:^DJI) dropped 237 points in late trading. The New York Times reported that Russian forces are conducting new military operations near the Ukraine boarder, which brings up fear that conflict could erupt if a looming Crimean vote to leave Ukraine for Russia passes.  

But the bigger fear was out of China where data shows a slowdown in industrial output growth and property sales. Industrial output grew 8.6% in the first two months of the year, which was well below the 9.7% growth in December. Worse yet, property sales fell 3.7% in the period versus a 26.3% increase last year.  

In the short term, this can cause stocks to fall because China has been the growth leader coming into and out of the recession. But longer term, there's worry that massive lending to businesses with little ability to pay the money back will lead to asset bubbles and a collapse in China if easy monetary policy and stimulus continues too long. So a slowdown may be a good sign for long-term investors, especially if that means business coming back to the U.S.

Similarities to the U.S. housing crash
The bubble fear from investors isn't dissimilar to the U.S. housing crash that brought the global economy to its knees in 2008. Low interest rates and lax lending standards led people without the financial ability to afford homes to buy real estate, pushing up prices. When "flipping" homes became popular speculators piled in and prices soared even more. Since construction and the industries that supply it are huge job generators the economy boomed as the bubble grew.

When the economy slowed banks realized they were lending to people who couldn't make their mortgage payments; lending came to a halt, killing employment and initiating a downward spiral for the economy.

Many economists fear the same thing will happen in China, not only in real estate but also for the hundreds of billions in loans given to businesses that operate with razor thin margins. If China slows down and they experience waning demand or can't fully utilize equipment, the result could be bankruptcies, banks pulling back on lending, and a hard economic fall in China.

The hope is that China's new leadership will help slow economic growth without leading to a crash, in what's dubbed a soft landing. Then China's economy could grow at a more sustainable rate of 4%-8% instead of double-digits seen over most of the past decade.

With so much uncertainty as to how much China's economy will grow, and if or when a slowdown will take place, it doesn't take much to cause a sell-off -- the data that came out today was enough to do it. I think China is the single biggest risk to the global economy, and investors would be wise to not only watch what's going on there but also to limit exposure to potential problems. The U.S. economy isn't a growth engine, but it's much safer than investing in China, especially if there is a collapse.

Invest in stocks for the long haul
It's days like today that highlight how volatile the market can be and why investors need to think long-term. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers