Wednesday, May 30, 2007

China Hiccups

The US markets opened lower today, as investors digested the overnight news from China. Stocks in China were down sharply on Wednesday because the government raised a tax on stock trades. The reason for this tax increase is an attempt to dampen some of the enthusiasm for stocks, due to a market boom. There are growing concerns about a possible bubble.

The main Shanghai Composite Index dropped 6.5 percent to 4,071.27 after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller secondary market closed at 1,199.45 a decline of 7.2 percent. The market plunge came on the heels of an announcement by the Finance Ministry that tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent. The change was effective Wednesday, as the the official Xinhua News Agency reported the ministry was trying to "cool the stock market".

The last time stocks plunged in China, which was February of this year, emerging markets took it on the chin. Stocks in the US and other mature markets also swooned as investors reacted to the news. Anytime you have a precipitous drop in a major market, there are bound to be ripple effects in all of the world's markets. One thing to remember is the fact that the markets do not move in a straight line, so after a period of increasing share prices, one has to expect a decline sooner or later. Hopefully, this will not be a correction that reclaims all of the gains made this year, but it is a distinct possibility. If you have a few dollars sitting on the sidelines, this may present an opportunity to buy shares at a lower cost. For those of you who continually dollar cost average, you will automatically reap the benefits of any sale on shares.

Later in the day, the US markets responded to the release of the FOMC minutes, as the S&P 500 index advanced to its first record close in more than seven years ending at 1,530.23. Investors concluded from the Fed report the evidence of a cooling economy might be a reason for the Federal Reserve to begin cutting interest rates in the second half of the year. The DJIA also closed in record territory at 13,633.08 as the markets shrugged off the news from China. Sometimes you just never know how the market will react to news, which is why I always recommend not letting emotion rule your investment decisions.

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