How does a Chinese land developer cause America’s stock market to dive? Springfield expert explains
SPRINGFIELD, Mo. (KY3) - September has historically been a time when the stock market takes a tumble and Monday there was a sizable fall.
The S&P 500 fell 1.7% to 4,357.73, posting its worst daily performance since May 12. The Dow Jones Industrial average lost 614.41 points, or 1.8%, to 33,970.47 for its biggest one day drop since July 19. The tech-heavy Nasdaq Composite dropped 2.2% to 14,713.90.
There were several contributing factors in the plunge but chief among them was the financial woes for Evergrande, China’s second-largest builder and land developer. It was once among the world’s largest companies but is now in danger of defaulting after going over $300 billion in debt to everyone from banks to bondholders to its own workers.
So why would a Chinese real estate developer play such a big part in a major dive in the U.S. stock market?
Well, the fear is that Evergrande’s failure to pay its debts will set off a chain reaction.
“It is a global society,” explained Dean Young, a Certified Financial Planner for over four decades with Heim-Young Associates Wealth Management in Springfield. “The amount of equity and value in stocks is greater outside the U.S. than in the U.S. itself. When it comes to Evergrande people are concerned that this problem could spread into other areas of investing if the company is not bailed out by China (the government).”
So what does that mean for people with 401 (k) retirement plans who are worried about the market’s volatility?
“Well, what it means primarily is that you should have a good financial plan before you go into the markets,” Young said. “And that usually involves a great deal of diversification. You should also always have a cash reserve to fall back on and you should recognize that investing in growth is a long-term proposition.”
During the day on Monday the Dow dropped over 900 points before recovering to just over 600 but Young said these types of fluctuations are to be expected.
“If you want to look at averages it is typical for the market to pull back anywhere from 10-15 percent in any given year for any given reason,” he said. “So maybe today this is just a reason dujour and a long-term investor, if they’re well-diversified and have a plan, should be very comfortable.”
Young also pointed out that it is important to put the numbers in perspective.
“In the summer of 1982 the entire Dow Jones was 700-and-something,” he said. “But today it’s coming off a high of 35,000 so we’re talking a loss of a couple of percentage points give-or-take and as dramatic as the numbers may sound, panic is not a strategy for investing. You’re going to have to go in with the idea of having your eyes open and invest in growth to the extent that fits your risk tolerance and what you really need. Sitting down and thinking through that in advance then allows you to not panic during times like this. This too shall pass and will be replaced by something else.”
Young explained it’s important that when you see market changes going on you RESPOND ACCORDINGLY as opposed to REACTING HASTILY.
“If you don’t feel well and go to the doctor who prescribes something and you REACT to that medicine, that’s not good,” he said. " But if you RESPOND to it that’s a good thing. So you should have that same attitude going into investing and the way you do that is by having proper diversification, a plan to start with and plenty of cash reserves. Ultimately that’s the key to success. You have to have staying power.”
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