Friends
Market pundits have been warning that we haven’t had a 5% pullback in the stock market for more than a year. Well, we have one now (well at least we had one midday before stocks recovered some towards the close). As we have seen for years, downturns in stocks happen quickly, though this one has been gathering some quiet strength for the past few weeks as we have noted on an almost daily basis.
The catalysts for today’s plunge in stocks is being credited to China and specifically a Chinese real estate development company which is circling the drain as we speak. But, the Chinese have been acting quite differently in recent weeks with their saber rattling towards American companies including the gambling casinos in Macau. Will the Chinese government bailout these real estate developers (which they encouraged to build apartment complex after apartment complex, many of which sit empty, for years now), or do they have other motives?
For those who follow the technical aspects of the market, we broke the 50 day moving average just slightly last Friday, but this too helped fuel today’s downturn. As mentioned, at one point today we had dropped 5%. 10% is what is labeled as a correction and that is about where the 200 day moving average is. Ironically, more than 60% of stocks are already below their 200 day moving average, which should not surprise us as we’ve known things have narrowed significantly in recent weeks with a handful of big cap growth names carrying the water.
Whatever the narrative, this sure was a risk off day in the markets. By the close, the Dow Jones Industrial Average was down 614 points to finish the day at 33,970. The S&P 500 was down 75 points to close at 4,357. The Nasdaq Composite Index was down 330 points to close at 14,713. Gold was up $12 to trade at $1,763 per ounce, while oil was down $1.26 to trade at $70.71 per barrel WTI.
So now we have added China to our list of worries, which had previously included the Delta Variant, inflation, lofty valuations, Fed tapering, spending bill, taxes, the debt ceiling, the upcoming earnings season, and seasonality. I’m sure I’m missing something in there. Today we heard that scary word “contagion” with regards to the Chinese real estate/banking issues. I’m not sure that is apropos at the moment. Unlike Lehman Brothers and the financial collapse back in 2008, our financial institutions don’t appear to be affected. Regardless, we knew that we would get a disruption at some point. Many have wondered why it hadn’t happened sooner. In portfolio design we always take into account that disruptions will happen, indeed stocks tend to swing more than 10% in any normal 12 month period. Will 5% be the extent of this current disruption? Will it be 10%? Will it be more? Of course, we don’t know, but as we always say – these disruptions are part of the price of admission to get on the ride. That ride is the one that allows us to grow our money over time and achieve financial security.
Sorry for the long/wordy email today. Given today’s market action, I had a lot on my mind.
Have a nice evening everyone.
