Economic Insights - September 2015

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As the S&P 500 tumbled from its peak in May, the pessimistic pundits eagerly anticipated a sequel to the "Panic of 2008." For the past six and one-half years, every time the market has gone down sharply for a day or two, or a piece of economic data turned negative, the decibels have risen. They have turned technical moves in stocks and seasonal patterns in data into fundamental reasons to run for the hills with guns, survival gear, and gold.

These fear-mongers are traders, not investors. Trading is short-term, involving technical factors and emotion. Such perennial short-sellers have a major problem: Markets always go up over time. So, to make money by shorting, they have to know exactly when to sell and when to cover. Almost no one can do this successfully over the long term.

On the contrary, investing involves long-term thinking about fundamental factors like profitability, new technologies, and major policy changes.

Short-sellers make their money from fear and confusion. Nothing creates fear like the belief that market declines are being caused by some powerful fundamental problem. But, such fundamental crises tend to be few and far between.

Today, the Business Briefings team sees no serious fundamental problems. China has fundamental problems, which could impact its neighbors. That's why we warned in late May that the "Chinese crash" was just ahead; it was the cover story of the June 2015 issue of Trends.

We've been saying for years that Chinese equities are very risky. However, keep in mind that U.S. exports to China represent just 0.7 percent of our GDP. So this will be nothing like the problem that our 2008 housing crisis created for China.

References

First Trust Advisors, August 24, 2015, "This Correction is Technical, Not Fundamental," by Brian S. Wesbury, et al. © 2015 First Trust Advisors L. P. All rights reserved.

To view this article, please visit:

http://www.ftportfolios.com/Commentary/EconomicResearch/2015/8/24/this-correction-is-technical,-not-fundamental

Trends , June 2015, Iss. 146, "The Great Chinese Tech Stock Bubble." © AudioTech, Inc. All rights reserved.

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