Evergrande shakes the markets
You never know what will send the markets scurrying, especially when we’re near record levels with no upward momentum to keep moving ahead. Enter Evergrande, a Chinese real estate developer with massive debt of $300 billion, and an $83 million interest payment due. The firm, the most indebted property developer in the world, said last week that it would be unable to meet its debt payment. In response, the Chinese government said it was indifferent as to whether it would step in and bail Evergrande out — or if it would step aside and allow it to fail. The potential default was all the markets needed to begin selling off. They stabilized a bit after talk began of Evergrande meeting near-term interest payments, but that doesn’t appear to have happened. Reactions to the announcement ran the gamut from no big deal to this being the new Lehman Brothers moment for China. In the end, markets rebounded as a neatly timed Federal Reserve meeting offered some relief. As the markets waited for the “financial cavalry” in the form of the Fed to arrive, momentary panic seemed to subside and put us back where we were before the news, treading water and looking for the next big announcement to propel us upward. Unfortunately, the same old problems that were there before the Evergrande scare hadn’t gone away: inflation fears, a slowing economy, a potential government shutdown, weak consumer confidence and the specter of massive additional spending in Washington. The House managed to pass a bill to suspend the debt ceiling and fund the government. The fate of the proposal is now with the Senate and is far from a done deal, but all this would do is delay an inevitable increase to our already massive national debt. With the Fed scaling back bond buying (more below), we will likely find ourselves in a more difficult situation to service our enormous debt via potentially higher interest rates just as the government seeks to add to that debt. That’s not the kind of momentum that will help propel markets upward; in fact, it’s just the kind of pressure the current stock market does not need. There’s never a bad time to reevaluate your exposure, but some times are better than others. This is one of them.
Fed signals it will taper
The Federal Reserve signaled it was ready to start reversing its pandemic stimulus programs this November. The Fed also indicated it could raise interest rates in 2022 amid risks of a lengthier-than anticipated jump in inflation. The Fed’s rate-setting committee indicated in its post-meeting statement Wednesday that it could start to reduce, or taper, its $120 billion in monthly asset purchases as soon as its next scheduled meeting, Nov. 2 and 3. Chairman Jerome Powell said officials hadn’t made a formal decision on how quickly to reduce purchases. Still, most agreed that a gradual process that concludes around the middle of next year could be appropriate. If that’s the case, we should see a $20 billion per month taper starting in December or January and ending in May or June. To be clear, that’s only a possibility of what the taper may look like, since the Fed was purposely vague. It seems the equity market has yet to fully digest the magnitude of the potential tapering, although the 10-year Treasury quickly jumped from 1.30% to 1.45% following the statement. Equity markets were too busy fretting about Evergrande and watching the Fed do its best to calm markets with soothing talk while not saying anything specific. (The bond market noticed, however.) Higher rates will likely have a profound effect on equities by providing an alternative to the red-hot stock market. They will also impact everything from mortgages to credit card balances and even the national debt, so the impact of removing artificially low rates and massive liquidity will be profound for not just the markets but also the economy. As we said earlier, it’s time to rebalance to your targets, especially if you’re on track with your goals and overexposed. In retrospect, we may look at current events as an obvious signal of shifting conditions.
Crypto tanks, while China declares it illegal
Remember all the excitement over cryptocurrency a few months ago? There was much debate over whether it was a currency, asset class or security (and as such, a speculative investment). Plus we also had lots of talk about whether it would hold up in a sell-off. Well, we got an answer last Monday when crypto took a front seat on the sell-off bus as markets tanked. There’s still one big question, and that is: What government in its right mind would welcome crypto as competition to its own currency? Sure, El Salvador has experimented with Bitcoin, but most significant world financial powers won’t relinquish control or introduce competition. China showed us just last week that cryptos can be made illegal at any time. In my opinion, you should use caution when incorporating crypto in your portfolio and be prepared for the ride to be extremely volatile and potentially costly. It’s best to keep in mind that any nation can declare it illegal at any time — and POOF!
Coming this week
- Lots of Fed officials are scheduled to give speeches this week. Keep an ear out for their tone regarding tapering.
- Consumer confidence has taken a beating lately, and a fresh reading Tuesday will show us whether that trend is continuing.
- The Case-Shiller housing index should show a continued increase in home prices. We’ll also have plenty of additional housing data this week, including housing starts (Tuesday) and mortgage applications (Wednesday). It will be a good gauge of whether the housing market is still as hot as it has been.
- We’ve been hearing a lot about supply chain bottlenecks and slowdowns in advance of the holidays. Retail and wholesale inventories will be of special interest on Tuesday.
- The third and final reading of second quarter GDP will be out on Thursday. The last reading was 6.5%, and expectations are for the number to stay the same.
- Consumer sentiment and spending will close out the data for the week on Friday. Again, weakness in this area will not be received well.