Flavor of the Week

This week I’ll just give you an overview of the news considering there was a lot of it. Blame it on the Fed, Central Bank…or China.

Fed meeting this week was a little more Hawkish than expected, with a 50/50 split on a rate rise for next year, and 3 rises expected in 2023. This is a sign that the Fed officials believe that the recovery is continuing along. 

Tapering is when the Central Bank reduces the rate at which it accumulates new assets on its balance sheet. It’s the first step in the process of winding down or withdrawing fully from a stimulus program.  Tapering is not tightening. Tightening refers to the raising of rates (discussed last paragraph), and is a way of putting the brakes on the economy. Tightening is what I blame for the 20% drop at the end of 2018. Tapering alone is not a big risk for stocks, it’s more of a concern wen tapering and tightening are happening at the same time. 

Evergrande, a Chinese Real Estate corporation has been threatening for weeks a default on some of their debt. The big question was whether the Chinese Government would assist or try to make an example of them and let them fail which is causing some volatility in the market. Late last night there was some news that some interest payments are being extended, and it appears at this stage that the company will end up being split into three different companies and be somewhat government sponsored. It’s one of the biggest real estate companies in the world and is probably also the most indebted. This caused a lot of defensive positioning from individuals and companies that are exposed.

The end result is looking like what most expected in that the government will step in and not let this be a Lehman Brothers type event. Letting this company default would undoubtedly have a ripple effect through global financial institutions, but as of now it’s looking like cooler heads are prevailing.

We will also see some games this week around the debt ceiling. Policy makers need to pass a bill before the end of the month to increase the debt ceiling or risk defaulting on debt payments. Don’t get overly consumed with this. We’ve dealt with this a number of times and it’s a platform for the “Poly-Tics” to grandstand and push their personal agenda. Nobody wants to the U.S. to default on its debt, it’s never happened, and is not likely to anytime soon.

Come next week we will start to move into earnings season. This is where we will see if the rubber hits the road.  As we look back Q3 2021 v Q 3 2020, there will be some uncertainty around supply and labor issues that is facing a lot of companies, but overall, I believe earnings will come in strong. Guidance will likely be cautious, and that may provide some short-term volatility.

Now for the past few weeks I’ve highlighted that we have not had a 5% pullback this year. We tried on Monday (4.03%) and it now looks like we are positive again for the week. These dips get bought very quickly, continuing the pattern we’ve had for the past few years.

In summary, there’s going to be some noise in the coming days and weeks, but nothing that will change the longer-term strategy. With that here’s the buy/sell.

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