China's stock index joined the global bear market today, tumbling 6.7% on fears that lending curbs will slow growth. In August, the Shanghai Composite dropped more than the 20% that defines a bear market. Everyone was hoping China would lead the world economy out of recession. China's bear panicked investors, creating a flight to safety as global stock markets fell and the dollar, Treasuries and yen rose.
The Chinese bear also blew the veil of illusion from stock prices, which are now seen as overpriced. Earnings valuations for European and Asian stocks have reached the most expensive levels in six years. This means that companies' earnings don't justify the high stock prices. Earnings represent the profit of a company. For this reason, they represent the return on investment for a stock.
What It Means to You
Stock prices will probably continue to drop until they are supported by earnings. In addition, September is usually a down month for stocks, and investors know this, which will probably put downward pressure as well. The S&P 500 has lost 1.3% on average since 1928 in September, according to data compiled by Bloomberg.
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Photo: Chinese Premier Wen Jiabao (Credit: Liu Jin/Getty Images)
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