The Dow Drops 200 Points: Is China and Cheap Oil To Blame?

The Stock Market plays such a vital role in the lives of most Americans. 401K, company stock options, and Investment firms, all rely on the stock market. The last thing people want to read or hear is that the thing they rely on for their retirement has just dropped shockingly low. This is exactly what people are dealing with Thursday January 7th 2016.

The latest Wall Street meltdown comes just as China’s own stock market fell 7% last night. The china stock market incurred losses so serious that all trading had to be stopped in the opening half hour of trading. The markets never reopened for the rest of the day. Then, crude oil dropped to its lowest margin in 12 years, falling below the numbers during the financial crisis of 2008.

According to CNN Money, the Dow plummeted over 300 points not long after the opening bell sounded Thursday January 7th 2016. The market recovered slightly and is only down 200 point as of 10:30 am Thursday. Consequently the Nasdaq fell 2%, while the S&P 500 dropped about 1.4%. Analyst’s are calling this “a brutal opening act to 2016,” as the Dow Jones posts its worst three-day start to a year since 2008.

Managing Director of MND Partners Tim Anderson wrote, “This has all the earmarks of the beginning of a significant stock market correction. Many would argue it’s the beginning of a bear market.” Experts say that the majority of the blame should go to China, as the country is seen as the largest threat to the United States stocks in 2016.

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Matt Egan at CNN Money reports that China’s stock market is a mess right now. What makes this true? Well, twice in four days, trading has been suspended because of new ‘circuit breaker’ rules revealed this week. There are those that believe that these new ‘circuit breaker’ rules, which were put in place to ease volatility, are greater problems.

It is believed that the new rules encourage many investors to sell stocks out of the fear that they will not be able to cash out before the trading has stopped. The rapid decline of The Chinese yuan has many investors perplexed. The China Central Bank set China’s currency at its weakest levels since 2011. Even though the devaluation of the currency has the potential to assist growth, it can also damage asset worth and cause money to leave the country.

The Central Bank of China reported that it went through an astounding $108 billion in foreign reserves last December. This was all in an attempt to retard the steep devaluation of the country’s currency. China still has about $3.3 trillion in cash reserves but, that is the lowest amount since 2012. Also, there have been several reports that reinforce the belief that China may be slowing down much more than investors are aware of.

Even though many Americans are pleased at the lowering of gas prices due to falling prices in crude oil, continual price drops may not be a good thing for the stock market. Crude oil continues to fall as it goes to its lowest levels since 2003 at $32.10. That’s a 4% drop in costs. This is a real concern for some investors as this price drop takes a serious bite out of energy companies profits.

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Oil’s price drop can be attributed mostly to greater supply than demand, which is a signal to many experts for poor global growth. The fear that most investors are feeling manifests itself in the fact that gold prices have gone up another 1.3%. the price of gold tends to rise when investor fear increases.

All of these factors has Wall Street coming dangerously close to its “correction” mode. One thing is certain, if the Dow Jones falls below 16,516, then correction mode will be in effect. This will be the first time it would have been done this since the summer of 2015. On Thursday January 7th, as of the writing of this article, it fell as low as 16,588.

It is fair to say that most people want lower prices for all the things they enjoy. Higher gas prices mean it costs companies large and small more to transport those goods from one place to the next. This in turn causes companies to charge more for their products to offset the cost of rising fuel prices.

Rising fuel costs means bigger profits for oil companies, which mean happier investors. Lower oil prices have the opposite effect. It just goes to show how connected the world has really become. And, how connected the world really needs to be. However, the American people, time and time again, have shown their resilience in such situations. Americans have always bounced back from stock market fluctuations, and by all indications, the same will be true again. This time however, let’s hope that the American people continue to emerge from this latest crisis, the same way they have for all others, smarter and wiser than when they went in.

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