The Chinese real estate company Evergrande is on the verge of defaulting on its nearly $300 billion in debt. Coincidently, the 13-year anniversary of the Lehman Brothers bankruptcy was just last week. Wall Street is feeling a little bit of déjà vu right now, and traders are reacting to the scary headlines this morning.
The reality, though, is that Evergrande is too big to fail-and I’m not alone in this thinking. My favorite economist Ed Yardeni (see Â Evergrande: Is It Lehman or LTCM?) commented this morning that the Chinese government is likely to intervene in order to protect the Chinese economy and global markets from the fallout. He noted that Evergrande management is likely to be replaced, and the company will probably be restructured.
Yardeni compared the current Evergrande situation to what occurred in 1998 with Long-Term Capital Management. At that time, the Federal Reserve and other major financial institutions stepped up to protect the U.S. economy-and global economy-from a major collapse when the hedge fund’s leveraged trading strategies failed.
The US stock markets are down, but the Chinese and Taiwanese stock markets are closed. China has had a debt bubble problem for years and this could be another warning sign. But China’s economy is slowing already and the Communist Party won’t let things get too out of control. President Xi Jinping is not coming to the UN annual meeting and he has declined a meeting with President Biden. Xi has some fixing to do at home.
Commodity prices are showing signs of weakness which will be good for inflation expectations, and the global economy including the US is weaker than we expected it would be just a month ago. The Atlanta Federal Reserve Bank’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is just 3.6 percent on September 16, down from over 6.0% in late August.
There are other scary reasons to be afraid like the headlines that tell us taxes are going up, the virus is out of control again and extreme weather is here to stay so watch out. Also, the Federal Reserve Open Market Committee (FOMC) meets this week and it is widely believed that the wise people will begin to pull back on buying bonds thereby freeing ever so slightly the interest rate market. Some say that is really scary.
What has this amounted to? The S&P 500 Index has pulled backed a mere -4% from its high at the beginning of the month. I remind you again that this is meaningless noise. I hope stocks go down more so we can finally add to great positions and put some cash to work.
Let me remind you once again: On average the stock market corrects almost 15% per year within an average year. We haven’t had one of those since the Coronavirus bottom in March of 2020.
Predicting a -15% pullback in the stock market at some point is the same mental exercise as predicting that virtually all the leaves will fall from the trees between Labor Day and Christmas. It is an average annual event. Observe:
“Despite average intra-year declines [since 1980] of 14.3%, annual returns [price only, not counting dividends] have been positive in 31 of 41 years.” – J.P. Morgan Asset Management Guide to the Markets, page 17
The news is meant to scare you out of the market. These times are temporary interruptions of the permanent uptrend. The US is still the place all the money will flow to. US stocks are still up +16% year to date – the best developed market in the world. Don’t be greedy when others are greedy, get your greed up when others are fearful — we are not even close yet.