Making sense of the stock rout puzzle

THE stock market movements of the last one month are puzzling.

Take the China explanation. A collapse of growth in China would indeed be a world-changing event. But there is just no evidence of such a collapse. At most, there is suggestive evidence of a mild slowdown, and even that is far from certain.

The mechanical effects of such a mild decrease on the US economy should - by all accounts, and all the models we have - be limited. Trade channels are limited (US exports to China represent less than 2 per cent of GDP), and so are financial linkages. The main effect of a slowdown in China would be through lower commodity prices, which should help rather than hurt the US.

Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil-importing countries such as the US. Consumers, with more money to spend, would increase consumption and increase output. Energy-using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment of energy-producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, ne…