On Aug. 24, the Dow Jones Industrial Average experienced the worst single day drop since 2011. The next day, it continued to slide, losing 588 points, or 3.6 percent, according to Business Insider.
With visions of the 2008 recession plaguing investors’ minds, friends asked if another market contraction was on the way.
Wednesday, the Dow Jones had a historic single-day rise, and everyone’s fear turned into confusion.
By the end of the week, the U.S. stock market ended above where it had started Monday — not bad for the next end-of-the-world recession.
So what happened?
To explain where this American stock market roller coaster started, we have to go where most American goods are made: China.
As you probably heard, last Monday the Chinese stock market dropped about 8.5 percent, wiping out more than $124 billion of worldwide wealth, according to Business Insider.
In today’s global economy, when one country’s market declines, shockwaves are felt in most other countries. When that decline happens to the world’s second-largest economy, you get panic.
There are many political and economic reasons for why China’s stock market crashed, but the central piece of information is clear: Its stock market was in a bubble. China’s rapid economic expansion caught up with them.
A bubble happens when an asset’s value is higher than its true value — sort of like the Donald Trump campaign: His poll numbers may be high right now, but the people who know what they’re doing don’t think he has any substance.
With a bubble, eventually the market corrects itself, and prices decline to their true values, causing the bubble to burst.
Chinese officials said there was no slowdown, but they most likely aren’t telling the truth.
This bubble seemed to burst in early July, when the Chinese stock market fell more than 30 percent in a three-week period.
Why did this affect U.S. stocks so much? It’s likely that people are ready to panic.
Many financial analysts believe the U.S. stock market is also in a bubble, created by the steady rise of the market coming out of the 2008 recession, and it’s almost ready to burst.
Add to this the insecurity in the Eurozone about Greece’s
ability to pay back debt, along with everyone waiting for the Chinese bubble to pop and anxiety left over from the 2008 crash, and you get a recipe for disaster more potent than the jungle juice at a fraternity tailgate.
At the first sight of trouble, people begin selling stocks to avoid the market decline, panic sets in and the result is a self-fulfilling prophecy of market decline.
But like Scrooge McDuck, people saw the low prices after last Monday’s drop and quickly bought what they believed to be cheap stocks, hence the increases we saw mid-week.
It’s called volatility. It happens daily, and it’s nothing new.
So no, this isn’t the beginning of another Great Depression.
There will be ramifications in global market. China will probably import less goods in the near future, and it’s likely their stock market will slip again soon, bringing political backlash.
Barring a major geopolitical event, there won’t be a big loss in the market in the immediate future.
However, many — including me — believe the U.S. stock market is due for a massive market correction, possibly a 10 to 15 percent decline.
No one can predict when it will happen. The best you can do is remember last week as a lesson: Good decisions are hardly ever made in the heat of the moment.
The market is cyclical. There will be ups and downs — you can’t control it. You can, however, control your emotions and actions and not buy the ticket on to the roller coaster of market volatility and hype.
The lazy river of smart inaction and consistency will get you to the same place as the roller coaster, but you get to have a couple beers and listen to the screaming from the roller coaster while you gently float down.
Jay Cranford is a 21-year-old finance senior from St. Simons Island, Georgia. You can reach him on Twitter @hjcranford.