Fall Has Arrived & So Has Market Volatility

From the Standing Desk of Brian Babbitt

With Fall in the air, families are returning from summer vacations, school is starting and for many it’s time to dig back into work projects. Fall always seems to be a transition period as everyone settles back into a new routine.

From a seasonal perspective, Fall has also been a volatile time for the stock market, and yesterday was no exception with the S&P 500 falling -1.7%. For some, yesterday’s pull-back may have come as a surprise after a relatively quiet summer and steady gains. Why did markets fall as much as they did yesterday? I’ve included a few worries on the minds of financial markets, along with reasons for continued optimism below:

 

Market Worries:

  1. China’s largest property developer, Evergrande is at risk of defaulting on its debt. Why is this important? Evergrande is so big that if it were to default, it could negatively impact its lenders and may spill over to the rest of the world.
  2. The Federal Reserve Bank (Fed) has begun a two day meeting. Some traders are worried that the Fed will taper its bond buying efforts prematurely. If premature, it could potentially reverse some of the economic gains since the start of Covid.
  3. Lawmakers are not working together and need to pass a budget – as in now. If lawmakers don’t pass a budget by the end of September, a shutdown may occur. The debt ceiling is also an issue that must be tackled. The lack of cooperation in Washington has created angst in financial markets. Other infrastructure/stimulus bills have also stalled recently.
  4. Recent economic readings in the U.S. have softened as the effects of the Delta Variant have taken a toll on reopening efforts. When considering it on its own, a slowing recovery is not overly worrisome, but in light of the developments mention above, it has traders worried.

 

 Reasons For Optimism:

  1. Some observers have mentioned that Evergrande will be treated as “too big to fail” by the Chinese government. If it were to get involved, the Chinese government could prevent financial contagion to the rest of the world.
  2. The Federal Reserve took extraordinary efforts to support the economy in 2020. Worries about tapering its purchases too early may be blown out of proportion. The Fed went through a similar scenario in 2013 and the economy emerged unscathed.
  3. This is not the first time that we’ve experienced brinkmanship on the part of lawmakers and most likely won’t be the last. There are cooler heads who believe agreements will be reached.
  4. Perhaps most importantly, the U.S. economy is on a relatively solid footing. Since the start of the pandemic, we’ve witnessed consumption gains, ongoing job growth and improving corporate profits.

 

Whatever the worries, it is nearly impossible to time markets and predict what might happen in the short term. What we do know is that patient investors have been rewarded and why its so important for our clients to stay the course and not allow these daily fluctuations to dictate decisions.

 

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