U.S. Stocks Dive After Chinese Market Rattles

U.S. stock markets suffer huge losses, in a day that will be remembered for its tremendous volatility. The Dow Jones Industrial Average was down about 300 points at mid-afternoon — at which point it lost another 200 points in mere minutes.

Experts say that the quick dip likely resulted from computerized trading programs. Before the markets closed, the Dow managed to bounce back 200 points. Still, at the end of the day, the Dow, the NASDAQ, and the S&P 500 were all down more than 3 percent.

The Dow index closed down 416 points, a slump tied to a plunge in the Chinese market earlier in the day. The blood-letting was the worst day for U.S. stocks since 2001.

It used to be said that when the New York Stock Exchange sneezes, the rest of the world catches a cold. But the old saying worked in reverse today, when a plunge in China's market sent ripples around the world. In Shanghai, stocks lost nearly 9 percent overnight.

Jason Kindopp, a China analyst with the Eurasia Group, says the Shanghai market fell because the Chinese government got nervous that too many Chinese people are investing too much in the stock market.

In the past 12 months, China's stock markets have exploded, gaining more than twice their value. Regular, every day Chinese citizens have been taking out second mortgages to buy stocks.

"It's really becoming a frenzy that's spreading rapidly throughout society," Kindopp says. As proof, he cites the spread of day-trading among university students and stay-at-home mothers.

People have been pouring their life savings into stocks; borrowing money from their relatives.

As a result, Kindopp says, Beijing's central government is terrified that if the stock market collapses, the whole economy will fall apart. So over the weekend, Beijing instituted some changes. It announcing plans to calm down stock market trading, to make it less frenzied.

The government announced the changes Sunday. Then Monday came, and nothing really happened.

"But it took the markets a day to really digest this information," Kindopp says, "and make them sufficiently nervous to make them sell off."

Tuesday (by Shanghai time; last night in New York) the Shanghai exchange fell dramatically. And by Tuesday morning, New York investors were feeling scared and ready to sell off as well.

The selling spree continued when trading opened in New York; the S&P 500 index saw its biggest one-day slide in three and a half years. Big losses were also posted on the New York Stock Exchange and the Nasdaq.

Tomorrow will tell if this was a one-day event or the beginning of a major market correction.