After a couple weeks of relatively smooth gains, the stock market returned to its volatile ways Friday, as the Dow Jones Industrials (DJINDICES:^DJI) dropped more than 250 points in the first 90 minutes of morning trading. Traders focused on three major elements in justifying the drop: the latest report on U.S. consumer prices, the ongoing difficulties concerning Greece and its bailout repayments, and tighter rules on margin lending in China. Yet despite short-term investors' knee-jerk reaction to the news, long-term investors shouldn't worry too much about these events.
China makes a smart move
The thing that some saw as the biggest threat to stocks should actually prove the most beneficial in the long run. The China Securities Regulatory Commission warned against borrowing to bet on the soaring Chinese stock market, which has doubled since this time last year and has seen gains accelerate in recent months. It also prohibited certain types of margin financing and put limits on using margin with smaller over-the-counter stocks.
The move from Chinese regulators shows the emerging-market giant has learned from the mistakes of other countries going through stock market booms as it tries to put the brakes on a rally whose pace is inherently unsustainable. By discouraging explosive short-term moves, the new rules could make a long-term rally more likely to survive, avoiding bubble-like effects that could destabilize and damage an economy that is already struggling with slowing growth.
Much ado about the same old same old
Meanwhile, other news also worried market participants, even while adding little new information to what investors already knew. Rhetoric over Greek debt got louder, as officials at the European Union and in the German Finance Ministry highlighted the need for Greece to address its debt sooner rather than later. For Greece's part, Prime Minister Alexis Tsipras remained confident that the struggling country would reach a deal with its creditors. Hopes for next week's meeting of eurozone finance ministers might be overly optimistic, but the parties are almost certain to ultimately reach some type of deal. Even if it doesn't fix the nation's problems for good, an agreement will buy Greece more time to figure out how to address longer-term concerns.
On the inflation front, some U.S. investors worried that prices climbed for the second straight month, as the consumer price index rose by 0.2%. A bounce in prices for gasoline and other energy products provided some of the upward pressure on prices, although the core rate gain matched the overall CPI's 0.2% rise as costs for healthcare, apparel, and automobiles all increased. Even with the gains, core inflation remained at a subdued rate of 1.8% over the past 12 months, showing that price increases are definitely not an immediate threat.
Falling stock prices are never comfortable, but you shouldn't read too much into a single day's news. In the long run, all the things people are worried about right now are likely to be resolved favorably. If that happens, today's big Dow drop will look completely unjustified in hindsight.