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3Qs: The Dow Jones’ wild Monday ride

The Dow Jones Industrial Average took a significant nosedive Monday morning, plunging more than 1,000 points and then encountering  drastic fluctuations throughout the day including the biggest intraday swing in history.

The Dow began its volatile roller coaster ride just moments after the opening bell on Monday morning, and finished the day 588 points down. Worries over a market slowdown in China had already affected markets worldwide on Friday.

born250Here, Northeastern University professor of finance Jeffery Born explains why what’s happening in China is impacting the U.S. stock market, the nature of the stock market, and what it all means for you.

What was the catalyst for the Dow Jones’ early plummet?

In a nutshell, much of the weakness in the U.S. stock market is connected with weakness in the Chinese stock market. Broadly speaking, stocks all around the world are rough substitutes for each other. When stock prices go down in China, they become “cheaper” than others around the world, which puts downward price pressure on other stocks around the world. Relative to Chinese stocks the rest of the world has become “expensive.”

Why does what is happening in China affect the U.S. stock market?

In my opinion, the downturn in the Chinese stock market is being driven by a steady stream of economic news and official statistics that show the Chinese economy is slowing down and is probably contracting. The recent surprise devaluation of the yuan is viewed as a confirmation of a slowing economy. By devaluing its currency, the Chinese government hopes to increase exports to the U.S. and the rest of the world. The yuan is tied to the value of the U.S. dollar and the strengthening value of the dollar during 2015 has made Chinese goods less competitive in world markets.

What does Monday’s stock activity mean for the general public?

The stock market is a bit like a roller coaster. There are plenty of ups and downs, but over the long run it generally rises. If your stock investments are primarily in your retirement fund and you are investing for the long term, there is not too much to be concerned about, unless you are retiring in a few days. For those who are short-term investors, the last week or so has been very painful.

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