Before The Bell
The world’s major equity markets are under significant selling pressure today after debt concerns in China emerged. Specifically, China-based property company Evergrande faced a debt crunch overnight, with the 8.25% Evergrande bond that has interest payments due this week trading at around 29 cents to the dollar this morning. These China debt fears, along with the looming debt ceiling debate on Capitol Hill later this month, and an energy market crunch in Europe (more below), sparked financial market fears across the globe. The major U.S. equity futures are down notably this morning, suggesting a sharp selloff at the opening bell.
The most recent week of trading had already seen a pickup in stock market volatility and this morning’s global developments did nothing to quell the emerging concerns on Wall Street. This anxiety is not overly surprising, as the market, which entered the month at or near record highs, is in the midst of a period (the months of September and October) that has historically produced some of the most uneven performances on Wall Street, highlighted by swift—and many times pronounced—daily and intra-day swings in trading. Last week, the major equity averages seesawed back and forth, with selloffs followed by buyers jumping into the market. The uneven performance, which included a selloff to end last week, is the result of investors dealing with a lot of uncertainty these days, including what the Federal Reserve will do during this week two-day monetary meeting, which commences tomorrow.
As noted, there is anxiety building among investors, as a number of factors, including this morning’s emerging concerns about China’s property market and Europe’s energy market, add to the “wall of worry” for equity market investors. The long list of concerns for investors also include uncertainty about the aforementioned monetary policy decision and commentary, the looming debt ceiling debate in Washington D.C., possible future tax hikes under President Biden’s proposed budget, the coronavirus’ Delta variant, inflationary pressures that are being stoked by rising demand and supply shortages, and signs of slowing growth in China. As noted, United Kingdom investors were watching the U.K. energy market, as the local government considers offering emergency state-backed loans to companies as wholesale gas prices have soared this year. Crude oil prices are under pressure this morning and the stocks of the energy companies are trading lower in pre-market action. Likewise, shares of the financial companies will be under pressure when the market opens stateside and there is a notable selloff taking place in the cryptocurrency markets.
This week, the equity market, which will likely be under heavy early week selling pressure, will be closely monitoring the Federal Reserve’s monetary policy decision and commentary from Fed Chairman Jerome Powell, which we will get at 2:00 P.M. (EDT) on Wednesday afternoon. Our sense is that with the aforementioned worries, the central bank will make no changes to either its asset-repurchase program or short-term interest rates. However, the possibility that the central bank will say that it will begin cutting back on its monthly $120 billion bond-buying program at its November FOMC meeting may be more fodder for the recently emboldened market bears. A cooler, though still elevated, reading on consumer prices and stronger than expected retail sales data for August last week had many pundits thinking those reports would give the Fed the opportunity to alert the market that it plans to begin tapering before year’s end. Will today’s debt fears out of China throw a wrench in the central bank’s tapering plans? We should learn more in a few days.
In addition to the Federal Reserve news, this week will bring a few important reports from the business beat, mostly centered on the U.S. housing market. We will get the latest residential construction figures (tomorrow morning), existing home sales (Wednesday), and new home sales (Friday). The homebuilding stocks have been under pressure in recent sessions, as industrywide raw materials shortages, and resultant higher operating costs for the builders, concern investors. These worries were exacerbated by the recent announcement from PulteGroup (PHM) that it was lowering its delivery guidance for the second half of this year due to supply-chain delays and commodities shortages.
So what is an investor to do with some of the major indexes not too far removed from their all-time highs and the aforementioned growing anxiety on Wall Street? Our recommendation is to keep a healthy portion of stocks in one’s investment portfolio, as there are still very few attractive alternatives to stocks. What we would do is give the high-quality stocks of companies with strong balance sheets and ample cash flow generation a closer look. This group includes many of the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line, which have historically fared better in the broader market during periods of heightened stock market volatility. In general, we are seeing a “flight-to-safety” movement taking place on Wall Street in recent weeks. The yield on the benchmark 10-year Treasury note, which moves inversely to the price, is down today, as investors gobble up safe-haven instruments.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
