September 24, 2021
Good morning,
The last day of a volatile week looks to kickoff on a down note. For the week so far, Monday’s selloff and the ensuing rally have left the index within a few basis points of where it started the week – up a little on the week if you use last night’s close, down a little on the week if you use this morning’s Futures equivalent. The down note overnight was likely due to a flurry of stories out of China related to Evergrande (payments do not look like they are coming) and the prohibition of any crypto transactions in that country.
In truth, this morning looks like a bit of a reversal of yesterday’s price action in equities and fixed income (note that the 10yrTreasury jumped 13bps in yield to 1.43% yesterday – more on that over the weekend). The S&P 500 Index is again above it’s 50-dma (4438) and traders will be watching that closely this morning wondering if the correction is over or not – I lean toward the former.
In the spring we talked a lot about bull market behavior as 2-yr olds – that was, of course, only after we established that this bull market was the 2yr kind rather than the much more common 1yr kind (that seems silly now – but retrospect will do that). Anyway, the bottom line was/is, for sophomores – stock market gains moderate as economic expansion slows, corrections are more common, and major bear markets are unlikely without an unusual exogenous catalyst.
We’ve covered the knowable, non-exogenous, catalysts for corrections; upcoming Fed taper, stalled stimulus talks, economic slowdown, inflation, seasonality, and an uneven recovery from the pandemic. Evergrande was/is exogenous, which was the reason for Monday’s severe trading action, but markets seem content for now that its failure will not lead to something more systemic.
One catalyst that hasn’t gotten much attention but one I think should soon be moved up the list of concerns is earnings and the likely sharp growth decline in them in 2022. Perhaps it is because earnings season is weeks away and is not an immediate concern, but expect it to creep higher in the market concern rankings soon.
Hope you have a very nice first fall weekend.
Be well,
Mike