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Market Commentary for the week ending September 25th, 2021
- Chinese real estate developer Evergrande teeters on the brink of collapse fueling fears worldwide.
- The Federal Reserve suggested higher interest rates are coming sooner than originally expected.
- The housing market remains hot although the pace of acceleration appears to have peaked.
This Week’s Performance Highlights
- Stocks started the week moving sharply lower on concerns about China’s Evergrande, a massive real estate developer in the midst of collapsing, with the Dow Jones Industrials down as much as 971 points before rebounding somewhat to close lower by 616. The following day stocks rallied in the morning then struggled and again closed lower but the tide shifted Wednesday following word from the Federal Reserve that they anticipate raising rates sooner than originally indicated.
- By the close of the week large U.S. stocks, as measured by both the S&P 500 and Dow Jones Industrials, were up +0.6% while the tech-heavy NASDAQ lagged behind closing nearly unchanged. Small U.S. stocks also gained +0.6%.
- The two sectors posting the biggest gains for the week were Energy and Financials up +4.6% and +2.2% respectively. Energy stocks were helped by a rally in the price of oil by more than $2.50 per barrel to close at $74.54 up from the low $60’s about a month ago. Financials were helped by rising bond yields and the anticipation of higher interest coming from the Fed.
- Also among the winners were many travel related stocks as illustrated in the accompanying table. Airline stocks got a lift from news that travel restrictions are easing opening up more opportunities for more travel and other stocks tagged along for the ride.
- International stocks lagged behind U.S. stocks for the week with developed markets on average lower by -0.3%. The performance was mixed though with Eurozone market higher helped by gains in France, Italy, and Spain among others while stocks in Japan fell by -1.1%.
- Emerging markets were hurt again by meaningful losses in China with stocks there off -4.2% for the week and now down -29.8% from their mid-February highs. This week’s losses in China were blamed on news that a massive Chinese real estate development firm, Evergrande, is having a difficulties paying suppliers and has warned that it could default on its debt. In spite of the big loss in China, the average emerging market was down just -1.2%.
- Commodities posted a +2.1% gain, helped by rising oil prices, and are now up +34.9% for the year. Gold and real estate stocks edged lower by -0.3% and -0.4% respectively.
- Bond prices had a relatively tough week down -0.4%. Prices fell and yields spiked following the Federal Reserve’s announcement on Wednesday that it expects to raise interest rates sooner than previously indicated. The yield on the benchmark 10-Year U.S. Treasury climbed from 1.371% to close the week at 1.454%.
Chinese real estate development firm Evergrande, with more than 1,300 projects and 200,000 employees, is reportedly on the brink of collapse being crushed under a debt load that is more than any other company in the world of $300 billion. The company’s stock has lost more than 90% of its value since mid-2020 with the company saying it could default on its debts. Some analysts are saying this would be the biggest test of China’s financial system in years with ramifications that could ripple worldwide. Investors around the world were rattled by this news early in the week with jitters then subsiding. Time will tell if this is a one-off event or just the tip of the iceberg.
New Home Sales: 740,000
Existing Home Sales: 5.88 million
New home sales rose by 11,000 homes to an annualized rate of 740,000 while existing home sales slipped to 5.88 million annually from 6.00 million the month before. The average price for a new home rose to $390,900 equaling the July record high. Overall inventories are improving which should reduce some of the upward pressure on prices.
As the accompanying graph shows, the rate of both new and existing home sales is higher than it was pre-COVID but both have come off their peaks.
Markit Manufacturing PMI: 60.5
Markit Services PMI: 54.4
Upcoming Economic Reports
- Durable Goods Orders
- Consumer Confidence Index
- S&P Case-Shiller Home Price Index
- Disposable Income and Consumer Spending
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