The S&P 500 avoided a third straight week of negative returns, but the index’s ability to eke out a small weekly gain was particularly noteworthy after stocks fell Monday by the most since May and investors narrowly dodged the first 5% correction since last October. Entering the week, stocks had already come under pressure, down eight of the last ten trading sessions, but emerging bankruptcy concerns around China’s Evergrande Group, the country’s second largest property developer, stoked major fears of possible financial market contagion and at Monday’s lows, the S&P 500 fell by as much as -2.9%. Evergrande is the world’s most indebted real-estate developer at around $300B in liabilities, so the company’s potential credit risk has long been acknowledged, but investors had generally assumed that the property giant was “too big to fail”. Over the weekend, however, the Chinese newspaper Global Times, widely viewed as a mouthpiece for the state, indicated that a government bailout was unlikely, and concerns of a possible bankruptcy event surged. As a result, the Dow Jones Industrial Average fell by as many as 970 points Monday afternoon and some pundits went as far as to evoke memories of Lehman Brothers, a volatility event we vividly remember weathering with many of our clients.
Despite Monday’s weakness, however, those fears of contagion were short lived and after Wednesday’s Federal Reserve announcements came in mostly as expected, investors bought the dip and stocks rallied quite impressively into the weekend. Evergrande could undoubtedly have broader market implications, particularly within China, but it is important to note that China has long limited foreign capital and corporate participation in its markets, and this segmentation severely blunts the odds of a global liquidity crisis anything close to what we saw with Lehman. Fed Chair, Jerome Powell, beyond indicating that an official taper announcement was likely in November, also reassured markets that “the Evergrande situation seems very particular to China”. Heading into next week, we expect investors to continue to parse through Wednesday’s Fed announcements that indicated the growing possibility for rate hikes in 2022, particularly with the yield on the 10-year US Treasury hitting 1.45%, its highest levels since the beginning of July. In addition, next week’s inflation report, personal consumption expenditures, and the potential for a government shutdown after the September 30th government spending expiration will be closely watched by investors.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO