The 2015 Chinese Stock Market Correction: A Tutorial

 

After four months of lackluster sideways trading, U.S. stock markets slipped slightly lower in July. And its no wonder, with all the social, political, and financial upheaval in Greece, compounded by the Chinese stock market crash.

Crash??!!

Let’s take a look at the Chinese stock market, using the Shanghai Stock Exchange Composite (SSEC) as our measuring tool. Knowledge is power, and if you learn more about what’s happened there, you might relax a bit.

Here’s a chart of the SSEC over the last three years. Do you see the big stock market run-up in late 2014? And then another huge stock market run-up in 2015?

Chart courtesy of StockCharts.com.

That’s not investing, folks. That’s gambling.

The SSEC closed at 2064.02 one year ago (July 8, 2014).

The SSEC finished the year at 3234.68 (Dec. 31, 2014), representing a 56.7% gain since July 8, 2014. Wow! I’m sure investors were thrilled!

 

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But wait … there’s more! The SSEC rested briefly, then took off again in March, peaking at the June 12th closing price of 5166.35.

That means that after rising 56.7% during the second half of 2014, the Shanghai Composite rose another 59.7% year-to-date through June 12, 2015. And if you’re measuring that gain from exactly one year ago (July 8, 2014), the Shanghai Composite rose as much as 150.3% through its peak (June 12, 2015) before falling in recent weeks.

The SSEC closed at 3727.12 yesterday (July 7, 2015).

 

Where does that leave investors?

If you owned a Chinese stock index mutual fund last summer, you’re probably up about 80% today.

If you didn’t buy a Chinese stock index mutual fund until Dec. 31, 2014, you’re up about 15% today, which is a lot better than anything you’ve earned through U.S. stock market index funds this year.

So relax. The Chinese stock market is doing the same thing that all stock markets do after they’ve run up a ridiculous amount: it is correcting. It hasn’t bottomed, yet, though. It’s not time for bargain hunters to jump in. There will be plenty of time for investors to wait for the SSEC to stabilize before it begins a real rebound.

As for Greece, I can’t help you there. Socialism doesn’t work; not as a political model, a financial model, or a moral model. Greece is collapsing, as all socialist and communist lifestyles eventually do. As the great Margaret Thatcher opined:

“The problem with socialism is that you eventually run out of

other people’s money.”

Chart courtesy of StockCharts.com.

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Happy investing!

 

Crista Huff

President

Goodfellow LLC

 

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