There hasn’t been a correction of 5% or more in the S&P 500 for almost a year, and that’s not healthy. It is even worrying. The last time we felt this way was at the end of 2007, a prelude to 2008 among the most volatile in stock market history.
This is how analyst Brett F. Ewing, chief strategist of the American firm First Franklin Financial Services, described before the start of the session Monday his discomfort in the face of the recklessness of stock marketers indulging in overbidding from of corporate profits. Darker clouds, however, were gathering above their heads. Variant Delta, persistent inflationary pressures, bottleneck and dysfunctional supply chains were sending mixed signals about the sustainability of the bullish momentum.
Above all, this good corporate profitability risks being weakened by issues relating to production costs with the rise in input prices, supply difficulties and the problem of hiring. And on the economic deceleration in 2022 after a year 2021 placed under the seal of catching up and advancing consumer purchases influenced by low interest rates. Added to this is the return to normalization of the monetary policy of central banks, launched by a gradual interruption of asset purchase programs that are now expected sooner rather than later. Indications in this direction should be presented this week at the end of the meeting of the Monetary Committee of the Federal Reserve.
The US central bank was already issuing signals in its latest report. We could observe there that a desire is developing among members to start reducing the scale of its asset purchase program, and this, before the end of the year, noted Bobby Bureau, analyst in fixed income and manager at Eterna Financial Group. “However, it is clear that a reduction in asset purchases is not a precursor to an impending key rate hike. This information was confirmed by the chairman of the US Federal Reserve during a speech in Jackson Hole. Mr Powell confirmed that the US central bank was planning to begin cutting its bond buying program later this year, but that it was unwilling to carry out a hasty tightening of monetary policy, even taking into account the the recent rise in inflation. “
All the same, enough to fuel upward pressure on longer-term bond interest rates, already under the influence of inflationary fears. What, also, to stir up volatility in a market increasingly cautious to risk taking.
Evergrande, a catalyst
This growing degree of risk aversion has found another justification in the woes of Chinese giant Evergrande, which faces important meetings with its creditors this week.
The real estate developer has accumulated a debt of more than 300 billion US dollars, capping more than 1,300 real estate projects – many of them unfinished for lack of liquidity – in more than 280 cities. Many small investors holding bonds, suppliers and subcontractors, nearly 300 regional banks and investment companies make up the list of creditors of this real estate giant whose vacillating base has come to remind the collapse of Lehman Brothers in this regard. month marking the 13the anniversary of the bankruptcy of the merchant bank.
All eyes are on the Chinese government, which has nevertheless denounced the monopolistic behavior of Evergrande in its offensive against real estate developers aimed at reducing this debt leverage and promoting increased access to residential property. And while it is true that an Evergrande fall would be felt on the credit market, threatening to amplify the deceleration in the activity of the second largest economy on the planet, analysts are now hesitating between a possible chain reaction creating a contagion effect and doubts about the systemic reach of the company, on the probabilities that its fall induces a large-scale liquidity crisis, as was the case in the Lehman Brothers’ wake.
Whatever the reading of the analysis, or its conclusions, Evergrande is added to the list of risks currently shaking the complacency of stock market investors.
Now, more and more analysts are sketching a market correction scenario. Morgan Stanley forecast Monday on a plunge of 20% or more of the S&P 500. The strategists of the firm base their projection on the loss of consumer confidence measured recently and on the profits of companies weighed down by a potentially higher level of taxation and the inflationary pressures. If this worst-case scenario does not materialize, Morgan Stanley still sees a decline of around 10% caused by the withdrawal of market support from the Federal Reserve.
The same goes for the investment bank Stifel, which spoke at the beginning of the month of a decline of around 10 to 15% of the benchmark index of the New York Stock Exchange during the last three months of 2021.