The US stock market recorded its biggest dip since October last year. The slump came about in the midst of concerns regarding China’s Evergrande defaulting, leading to a domino effect in the financial markets.
Evergrande is the biggest property developer in China and is debt engorged to the extent that market participants are worried it might not be able to repay its debts. This in turn will cause damage to investors worldwide. Another concern for the investors is the signalling of the US Federal Reserve to pull back on the support measures it has been granting to the markets.
Wall Street closed at a sharp decline on Monday, leading to the biggest dip at the S&P 500 Index since May. The Index has constantly been on the rise for a remarkably long period without a 5% pullback. However, S&P 500 recorded a drop of 75.26 points and is on track for its first monthly decline since January.
The Dow Jones Industrial average, blue-chip index and the Nasdaq dropped 614.41 points, 971 points and 330.06 points respectively. Even Hong Kong’s main index, the Hang Seng fell 3.3pc which is its sharpest decline since July. A 2 % decline was witnessed in the European markets.
Chief Investment Strategist at State Street Global Advisers Michael Arone said, “What’s happened here is that the list of risks has finally become too big to ignore. There’s just a lot of uncertainty at a seasonally challenging time for the market.
The primary concern right now is the potential for a chain reaction in the Chinese property development sector, in case of the collapse of Evergrande, which could spill over the broader financial system reminiscent of the financial crisis of 2008 which was inflamed by the collapse of Lehman Brothers. The fears are not unfounded as these property companies are one of the biggest drivers of China’s economy, which is the second-largest in the world.
If they fail to make good on their debts, the heavy losses taken by investors who hold their bonds would raise worries about their financial strength. Those bondholders could also be forced to sell other, unrelated investments to raise cash, which could hurt prices in seemingly unrelated markets. It’s a product of how tightly connected global markets have become, and it’s a concept the financial world calls “contagion”.
Many analysts say they expect China’s government to prevent such a scenario, and that this does not look like a Lehman-type moment. Nevertheless, any hint of uncertainty may be enough to upset Wall Street after the S&P 500 has glided higher in an almost uninterrupted fashion since October.
Besides Evergrande, several other concerns have been lurking underneath the stock market’s mostly calm. The Federal Reserve is expected to let off the accelerator on its support for the economy, Congress may opt for a destructive game of chicken before allowing the US Treasury to borrow more money and to make things worse, the COVID-19 pandemic continues to weigh on the global economy.
Analysts are of the opinion that this decline was inevitable, irrespective of the primary reason for Monday’s readings in the stock market. They highlight that the constant surge in the stock prices without even a 5pc dip since October in the S&P 500 allowed for less room for error while leaving the stocks looking more expensive.
The aforementioned concerns have left the participants and analysts at Wall Street to forecast further drops in the stocks. Morgan Stanley strategists said on Monday that conditions may be ripening to cause a fall of 20 per cent or more for the S&P 500. They pointed to weakening confidence among shoppers, the potential for higher taxes plus inflation to eat into corporate profits and other signs that the economy’s growth may slow sharply.
Morgan Stanley’s Michael Wilson said that even if the economy can avoid that worse-than-expected slowdown, stocks could nevertheless drop about 10 per cent as the Fed pares back on its support for markets. The Fed is due to deliver its latest economic and interest rate policy update on Wednesday.
Following a similar line of thought, a strategist at Stifel Barry Bannister said that he expects a drop of 10 per cent to 15 per cent for the S&P 500 in the final three months of the year. Savita Subramanian, a strategist at Bank of America also expects a similar drop as she set a target of 4,250 for the S&P 500 by the end of the year. That would be a 4.1 per cent drop from Friday’s close.
Apple stocks dropped 2.1pc while Nvidia experienced a drop of 3.6 pc leading to the technology companies contributing to a further low for the market. Similarly, Banks reported significant losses which lead to their inability to charge higher interest rates on loans. The yield on the 10-year Treasury fell to 1.31 per cent from 1.37 per cent late Friday. Bank of America fell 3.4 per cent.
Oil prices fell 2.3% and weighed down energy stocks. ExxonMobil fell 2.7%. Smaller company stocks were among the biggest losers. The Russell 2000 fell 54.67 points, or 2.4%, to 2,182.20. According to Coindesk, bitcoin also experienced a drop of 8pc.
However, Airlines were one of the few who fared well on the stock market as American Airlines rose 3 per cent to lead all the gainers in the S&P 500, Delta Air Lines rose 1.7 per cent and United Airlines added 1.6 per cent.
As the next round of corporate earnings is around the corner, it will allow investors to further identify the effect of this slowdown on a myriad of companies across various sectors. Solid earnings have been a key driver for stocks, but supply chain disruptions, higher costs and other factors could make it more of a struggle for companies to meet high expectations.