Risks to the Market

On Monday equities slipped markedly, with the S&P 500 down nearly 2% and other global markets down even more. As there are several financial and economic risks coming to a head at this time, it was unsurprising to see volatility jump, as the coming weeks have the potential to test investors’ nerves.

One ongoing source of market angst is Evergrande, the massive Chinese real estate firm. The company has debts of over $300 billion, has faced increased scrutiny from regulators to reduce debt relative to assets, and has an $83 million interest payment due on Thursday that it may not be able to meet. Foreign investment in China’s property market and financial system is still relatively small, but given the size of China’s economy, a slowdown or recession there would have spillover effects globally.

In the US, it is crunch time for the Democrats’ reconciliation bill of social spending; given that its fate is at least loosely tethered to the bipartisan infrastructure bill that passed the Senate, it’s not a safe assumption at this point that either bill passes the House—centrist demands to reduce the size and scope of the reconciliation bill may be anathema to progressives, who in turn could reject the bipartisan bill. Moreover, the US needs to approve an increase in the debt ceiling, and Democrats and Republicans are playing a game of chicken in this matter—Democrats insist that the increase should be passed in a bipartisan manner, per past tradition, while Republicans argue that Democrats should pass it themselves in the reconciliation bill.

The Fed is also meeting this week, with results guaranteed to increase concerns of at least some Fed watchers—those worried about growth if the Fed begins to withdraw monetary support, and those worried about inflation if the Fed doesn’t.

Finally, while COVID cases have declined in the southern US, the baseline number of cases is still high across the country, and we face the risk of a COVID resurgence in the midwest and northeast due to COVID’s seasonality and colder weather. US adult vaccination rates have risen to over 76%, but the delta variant and waning vaccine immunity means that the potential for outbreaks is far from over.

Markets did recover somewhat in the last hour of Monday’s trading, and there’s no guarantee that a correction is imminent. But with mounting risks facing the market, it is important to have a diverse portfolio with multiple levers to pull, depending on what we experience in the coming months.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation.  Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.