The stock market got a little crazy this week. A few things are driving the market volatility (it’s not just the usual suspects).
There’s a new player: Fears of a financial crisis in China.
China’s overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt. Once the news came out, the initial question was whether this was going to be China’s Lehman Brothers, whose failure in 2008 triggered a cascade of defaults among banks, suppliers and investors.
Worries the Federal Reserve will start tapering soon.
The Fed meets this month and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved. Firms that depend on low interest rates and easy credit could be hurt.
Positive: After the Fed announced that tapering would begin soon, but gave no timeline, the Dow extended it’s gains on the day.
Concerns about COVID-19 case numbers.
Variants continue to pop up, and the Delta variant keeps cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.
Fears of another debt ceiling showdown.
Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.
Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinkmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets
Do you see a trend? Markets are being driven by fear, anxiety and doubt. Which of these squalls will fade away and which could blow into a tempest? We can’t know.
Could we see a 10%+ correction in the weeks or months ahead? Possibly. Corrections and pullbacks happen regularly, and it wouldn’t be surprising to see a market drop. Randy Carver, an advisor in Ohio, thinks that a 20%-30% correction would be a good thing.
To show you just how ordinary corrections are, here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance.
(Take a look at the red circles to see the market drops each year.)
The big takeaway? In 14 of the last 20 years, markets have dropped at least 10%.
Even years with strong performance saw big drops. We’re dealing with a lot of uncertainty and investors are feeling understandably cautious about what’s ahead. But, that doesn’t mean that we should panic and rush for the exits. Pullbacks, corrections and even downturns don’t last forever. It’s important to trust the process and the strategy.