Why do global economic issues affect local stock markets?

Question

So we have a collection of bad economic news coming out of Asia at the moment. I currently own shares in Target, an exclusively American company with no economic sales ties outside of the USA, although I'm sure many of its suppliers produce their products outside of the USA. Still, that doesn't seem to justify a drop in share price of about $4.50 over the last few weeks, especially since Target reported earnings results which exceeded earnings estimates for the fourth quarter and year of 2006.

Can somebody with more knowledge than I have explain to me why all of these things are so closely tied to each other?

Answer 1

Here are a couple of reasons.

Suppose I work for a company that makes widgets, and we sell a lot of widgets to Chinese customers. If the Chinese economy slows, they will buy less widgets and I may lose my job. If I lose my job, I will spend less at Target.

Second, suppose I invested in a mutual fund that has money invested in China. If most Chinese stocks fall, the value of my portfolio will fall, and I will have less money to spend at Target.

I have no idea if a $4.50 drop in the share price was rational or not since I don't follow Target, but there is an old saying worth remembering: "The market can remain irrational longer than you can remain solvent."

Answer 2

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