U.S. stock benchmarks were on track to post their worst daily drops in more than two months, with the skid being blamed on the potential collapse of Evergrande. The Chinese property giant is threatening to default on $300 billion in debt that could ripple through global markets.
However, the downturn in the highly leveraged real-estate sector, which the Financial Times notes makes up more than 28% of China’s economy, isn’t the only problem for markets on Monday.
The following are a handful of others.
The delta variant of COVID-19 is resulting in higher case tallies in the world’s largest economy.
The U.S. is now averaging more than 2,000 deaths daily, according to a New York Times tracker, the most since March 1, and consist almost entirely of unvaccinated people. Florida, which has vaccinated 56% of its population, is averaging 353 deaths a day. Texas, where 50% of the population is inoculated, is seeing 286 deaths a day, according to the Times. Those two states account for more than 30% of all COVID-19 deaths since March 1.
Fed taper talk
Markets are fixated on the rate-setting Federal Open Market Committee’s Sept. 21-22 meeting, where Fed officials face the prospect of winding down the accommodations that have propped markets up since the start of the COVID-19 pandemic in the U.S., even as the economic rebound looks uneven.
The Fed has been buying $80 billion in Treasurys and $40 billion in mortgage-backed securities each month since last June to keep long-term interest rates low and bolster demand. It said it would maintain the purchases until the economy hit a threshold of “substantial” progress on inflation and in the labor market, and the question the market is weighing is whether the time for tapering those asset purchases is now.
A number of Fed officials have expressed a desire to announce tapering at the September meeting and begin the initiative before year-end.
Investors are anxious about the timetable for such reductions and are also looking out for any signals of an interest-rate increase in 2022.
On Sunday, U.S. Treasury Secretary Janet Yellen urged Congress to raise or suspend the nation’s debt ceiling or risk “widespread economic catastrophe.”
In an op-ed published by the Wall Street Journal, Yellen, a former Fed chair, noted that the U.S. has never defaulted, and she said it must not do so now.
Congress has raised or suspended the debt limit about 80 times since 1960, Yellen said, and during the Trump administration congressional Democrats agreed three times to suspend the debt ceiling. Senate Minority Leader Mitch McConnell has indicated repeatedly that he and fellow Republicans are not inclined to do the same.
The country’s accumulated debt is about $28.4 trillion.
September and stock-market seasonality
There is a growing sense that valuations are rich and the Federal Reserve’s easy-money punchbowl will be yanked away at the worst possible time. Seasonally, September has been one of the worst months for stocks, and investors think that the market might behave true to that pattern.
A correction is due
Strategists think that the market is due for a significant pullback as the S&P 500 has recorded more than 200 sessions without having seen a drawdown of 5% or more from a recent peak, making the current stretch of levitation the longest such since around 2016, when the market went 404 sessions without falling by at least 5% peak to trough.
Inflation continues to dog markets. Data recently showed that the cost of living for Americans rose in August at the slowest pace in seven months and signaled the surge in inflation this year may have peaked, but Americans probably aren’t going to get much relief from these elevated prices soon.
Inflation is defined as the cost of living rising across the board with purchasing power diminishing. It isn’t uncommon for prices to rise and an increase of about 2% annually is typically seen as appropriate for a healthy economy.
However, the rate price increases has been higher in the aftermath of the initial economic shock of the COVID pandemic.
Aside from a brief oil-driven spike in 2008, consumer prices have risen this year at the fastest pace in three decades. And a new survey by the New York Federal Reserve shows consumers expect inflation to average 5.2% in the next 12 months.
However, market participants and corporate executives aren’t clear on the duration of pricing pressures, including wage inflation, and how much of that can be passed on to customers.
Wages are climbing at the fastest pace in more than a decade, and companies desperate to hire more workers are raising wages because they can’t find enough qualified applicants at existing pay levels.
Buy the dip?
Investors have grown accustomed to buying market downturns, referred to as buying the dip. However, Monday’s action, and trading over the past week, suggests that investors are becoming more reluctant to purchasing beaten-down stocks with expectations that stock values will resume record run-ups after modest declines.
On Friday, the S&P 500 closed below its short-term trend line for the first time since around June, which could reflect the erosion of buy-the-dip behaviors.