Will 2016 be a repeat of 2008? What might be the appropriate US Federal Reserve policy?
After the convulsions of the past two weeks, these are the questions that observers on Wall Street are now asking. As always, the answer depends on who you approach.
In their quest to reassure, experts have pointed out that a) although China has problems with its economic restructuring, the violence of the sell-off in its equities does not necessarily foretell an economic meltdown because its stock market is very sentiment-driven due to high retail participation; b) the China economy is unlikely to suffer a "hard landing" although it is undoubtedly slowing and c) the US economy appears to be chugging along nicely so a global recession isn't on the cards.
In a nutshell, these analysts would answer "no" to the first question posed earlier, advising investors to adhere to the view that growth is still intact albeit moderating and a crash is unlikely, although volatility will remain high for a while longer.
This is the "glass is half-full" way of looking at things, where the positives are highlighted and the negatives downplayed. It isn't wrong by any stretch, and given the depressing start to the new year, certainly welcome.
It is also well-grounded in fact - for example, the US' economic numbers appear OK and so are China's, even if upward momentum in the latter is weakening. However, there are always two sides to the same coin, and traders know full well that when it suits, markets can choose to see the glass as half-empty. Valuations can suddenly become too high, and the outlook, which only a short while ago looked bright, can abruptly dim.
Momentum plays a crucial role in how the glass is seen. Recall that exactly one month ago the Fed declared the danger that China posed to be over, thus clearing the way to an interest rate hike. It acted because from September to early December, the China stock market stabilised after efforts by the country's central bank, thus giving the impression - now proven to be mistaken - that the alarming plunges triggered by the yuan's devaluation in August were over. That rate hike, which came because one central bank implicitly endorsed the efforts of another, is now looking highly premature.
Optimists might highlight the fact that the Straits Times Index's (STI) fall from its high last April of 3,539 is now almost 26 per cent, which puts the Singapore market firmly in bear territory as the latter is defined by at least a 20 per cent correction. Since the economic outlook isn't that grim, this means the selling is overdone and a bottom has to be close. Pessimists, on the other hand, might counter that at the present level of just above 2,600, the STI is still 86 per cent up from its 2008 sub-prime crisis low of 1,400, so optimists should look out below.
Optimists could contend that lower oil prices should translate to higher personal disposal income and therefore consumer spending, and that China must benefit since it is a net importer of oil and aims to be a consumer-led economy. In time, the country's economic numbers must therefore start to show improvement.
Pessimists might reply that while Wall Street may have come under severe contagion selling because of China, the Dow Jones Industrial Average at around 16,000 has only fallen 12 per cent from its all-time high and is still 128 per cent up from its 2008 low of around 7,000, so it hasn't corrected by much. Even after Friday's blowout, the Dow is only back to its lowest since August and a fall to a five-month low isn't much to worry about - yet.
You'd have to wonder though - since the Fed has repeatedly bailed out Wall Street since 2008, will it do so again if the plunges continue?