On October 28th, 1929 the Dow Jones Industrial Average fell 12.8%.
On May 28th, 2015 the Shanghai Composite Index dropped 6.5% – the largest fall since 2008.
The Wall Street crash took place after a period of speculative buying where many Americans were borrowing money to invest in stocks. The same can be said about Chinese investors, and to a lesser extent American investors as of late. As P/E ratios drift higher and higher, or non-profitable company stocks start to rise, it’s only a matter of time before the market gets overheated. Considering many of these investors are using borrowed money, the risk of sudden downturn is higher – Margin loans must be called if account balances get too low, and burned investors will not be able to get back in the market.
Whether the 6% drop is a prelude to something bigger is yet to be seen – but keep in mind the market in China does not allow single shares to go down more than 10% in a single day, which means we may see a further drop tomorrow. This will in turn put stress on Chinese investment banks and will have a trickle down effect on the Chinese economy. If mom and pop investors are all putting their life savings in the stock market do you think they will spend as much on the street as they used to?
Anyways, this is all speculation, but I think it’s safe to say we are going to be seeing some pretty interesting financial news come out in the next few months.