U.S. equity markets posted slight gains last week as volatility made a comeback. Concerns were three-fold. First, Chinese property developer Evergrande took centerstage with the possibility of defaulting on bond payments. A likely bankruptcy filing or restructuring would probably follow. Most analysts believe concerns are overblown on the potential ripple through global markets. Evergrande’s debt was already “junk-rated” for years and most financiers are located in China. The only exception are a few hedge funds with exposure but still nothing for investors around the world to be concerned with.
Second, and more concerning, China’s growth rate for the second quarter dismally missed analysts estimates. This disappointment comes on the heels of a strong first quarter when the world’s second-largest economy posted a whopping annual growth rate 18.3%. The chart below from the National Bureau of Statistics of China shows how growth has reversed course after rebounding since the beginning of the pandemic.
Third and most concerning is the potential threat inflation may pose to the U.S. economy. Consumer prices increased 5.3% in August and producer prices increased 8.3%. That was the second-largest increase is 13 years. The Fed has said they believe the current spike in inflation is due to supply chain challenges; a result of the shutdown and production cutbacks during the pandemic. However, it now seems the Fed believes this “transitory” inflation may be around longer than originally expected. The central bank has increased their 2022 target for inflation to 2.3% up from the previous 2% figure. This may explain why the Fed is intent on ending their $120 billion a month bond-buying program that was designed to help stimulate growth.
Indeed the Fed isn’t the only one concerned about inflation. According to FactSet, almost half of S&P 500 companies are citing inflation concerns on analysts calls. The chart below from FactSet puts things into perspective.
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While inflation is a major concern, a small amount can actually help the economy and stock market. That is probably why we saw the strong rebound later in the week. If you have any questions, please contact me.
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The Markets and Economy
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
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