China Sneezes; U.S. Market Catches Paranoia

"If you can keep your head when all about you are losing theirs ..." begins Rudyard Kipling's poem "If."

Barracks humorists subsequently completed the line with "... you must be among the 10% who didn't get the word."

Count me in that 10%.

I don't understand why developed world markets, markets that have made minimal to moderate advances on average in recent years, should panic to roughly the same degree as developing world markets have done, especially when those once-peripheral markets had been soaring at near triple-digit rates.

Developed Markets Trailed on the Way Up ...

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Source: Bloomberg

There may be a kernel of truth to the saying that what goes up must come down, but why must what hasn't gone up come down right alongside them?

... But Kept Pace With Emerging Markets on the Way Down

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Source: Bloomberg

When the Chinese markets slipped a sprocket last week, the rest of the world's markets clanked right along with them. Their major indices had roughly doubled in 12 months, a sprightly recovery after four years of disappointing results. The Chinese economy's powerful performance had not been reflected in its stock markets, but the markets began to catch up fast over the past 15 months. Should we be surprised that a market -- any market, from a major index to an obscure commodity -- that has ballooned might lose a little air from time to time?

It is possible to imagine that China's markets might have had a spasm and ours might have ignored it; up 100% is different from up 8% in terms of being in need of a correction. China may be growing faster than the rest of the world, but it is hard to argue that our market was as much "ahead of itself" as China's might have been.

Still, developed world markets pulled back as if they too had been on an Icarus-like trajectory. There was just enough concern about the position of the U.S. business cycle -- and just enough worry that the allegation of investor complacency had merit -- to constitute fertile ground for the seeds of panic.

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Jim Griffin is economic consultant and portfolio adviser to ING Investment Management and its Hartford-based unit, ING Aeltus, which manages institutional investment accounts and acts as adviser to the ING Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.