NEW YORK (TheStreet) -- The Chinese dragon is breathing a lot less fire these days, and the plunge in that nation's stocks over the past several sessions has been brutal for investors.
But it should hardly come as a surprise. We've been seeing signs of problems for quite some time. Manufacturing data has been slowing for months; stock prices have been steadily falling from orbit; and the surprise decision to devalue the renminbi -- not to mention the fifth consecutive rate cut announced by a nervous central bank on Tuesday -- indicates that the central government may not have the degree of control over the economy that many have assumed.
That doesn't mean gloom and doom for everyone, everywhere. Figuring out which companies have direct exposure to China's woes -- and which don't -- can make or break a portfolio in the current climate. And that means now's the time for active investment management.
Passive investment -- through vehicles like exchange-traded funds -- makes sense in plenty of market environments. This isn't one of them.
Historically, a passive strategy works best when there's a high correlation between the best and worst performing stocks. When all stocks are essentially moving in the same direction, and volatility remains low, there's little to be gained from an active strategy.
When QE was still in effect, that correlation was high. The Fed's safety net allowed investors to take on substantial levels of risk in the stock market. And in that environment, low-quality companies within the major indexes -- even ones with high debt and non-existent earnings -- were able to do as well (and sometimes better) than their higher quality counterparts.
But that correlation typically weakens when interest rates are rising -- and since the Fed ended QE in October, the only direction for rates to go now is up. The safety net is gone.
And as the fallout from the Chinese turmoil works its way through the global markets, there's room for the expert analysis of active managers to sift through the carnage and find which companies have truly significant exposure to the broader systemic problems in the world's second-largest economy and which don't.
Stocks with heavy exposure to the Chinese growth story could be facing a very bumpy ride ahead. Others have less risk overhang.
Many believe the Chinese government will try to engineer a soft landing that will gradually bring the economy's growth rate down toward a more sustainable 5% from the current rate of around 7%.
But it may be unable to do so. A hard landing could complicate an already complicated market.
And while Fed Chair Janet Yellen stays mum on whether the current volatility is enough to keep a rate hike on hold for now, the markets will remain nervous.
Nervous markets are unpredictable, by definition, but that doesn't mean it's time for the bears to take center stage.
Meanwhile, the debate over active and passive management now seems almost as old as investing itself.
What's for certain, though, is that active beats passive with fairly regular cyclical regularity. In our analysis, a majority of active managers outperformed their benchmarks in 11 of the calendar years since 1989 - most recently in 2013, 2009 and 2007.
The upheavals in the market indicate the next time may well be right now.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.