Now the stock market is over-reacting to the slowdown in the Chinese economy, reducing worldwide growth somewhat. Remember a few months ago, we were over-reacting to a potential default by Greece. Earlier, we were over-reacting to the Ukraine invasion. Have we already forgotten when we over-reacted to the Fiscal Cliff?
Of course, it’s different this time. It is always different this time, even if not significantly different.
There is an important distinction to keep in mind. Slowing economic growth in China, invasions of second- or third-world nations, political turmoil and so forth are all routine, expected, and pose minimal systemic risks for the financial system. They will always be part of the investing world and can best be described as “buying opportunities.” The distinction is that a financial crisis, such as a Lehman Brothers blow-up or a default by Greece during the early days, can easily dislodge any number of derivatives, creating a potential systemic problem. This is not the time!
The stock market is expected to lose about 400 points when it opens. This is not a systemic risk. This is a buying opportunity! But, be careful not to “catch a falling knife.”