Global stocks endured their first losing month since January. Looming defaults by China’s mega-developer Evergrande grabbed headlines, but anticipation of decelerating Fed stimulus appeared to be the bigger factor. Bond prices were also negatively impacted, and mortgage rates climbed back toward 3%. Value outperformed growth, as highly priced growth stocks remain viewed as being more reliant on ultra-low interest rates.
Market Corrections are Normal
Consistent gains since the initial pandemic crash have lured many into a sense of overconfidence. The recent turbulence provides a reminder that corrections are a normal and healthy party of equity investing. Corrections happen in most years and diversified investors should not be surprised or particularly uncomfortable.
The Fed Meeting
At the Fed meeting in September, Chairman Powell said, “moderation in the pace of asset purchases may soon be warranted”. Fed members also indicated that they expect higher inflation for this year, while sticking to the theme that recent inflation is largely “transitory”. Since the end of the subprime crisis 12 years ago, the first reaction of Fed and government has generally been to find ways to support asset prices and the economy at any material sign of weakness. It has favored short term benefits over unknown longer-term consequences. Unprecedented fiscal and monetary conditions fueling the long bull market and Covid-era rally will not last forever, but they remain a powerful force.
With $300 billion in outstanding debt, Evergrande is big enough to cause waves and some damage. However, we do not believe defaults by Evergrande will create a dreaded “Lehman moment”. The evolution of China’s increasing business regulation and references to socialist ideology will prove more important, in our view.