Monthly Observations from CIO, Chris Zaccarelli
Markets in Review
Stock markets fell again in September, giving up even more ground, with the S&P 500 falling -4.9% and reducing its year-to-date gains to 11.7%. The MSCI All Country World index also fell, down -4.3% for the month, which puts its year-to-date return at 8.5%. Bonds also dropped with the Bloomberg BarCap U.S. Aggregate Bond index losing -2.5% in August, which leaves its year-to-date return at a -1.2% loss.
The large drop in the stock market has been attributed to rising bond yields, rising oil prices, and increasing risk of an economic slowdown due to striking workers and a potential government shutdown. The higher level of interest rates in the economy, because of Federal Reserve actions, is starting to take its toll, but for now, the economy appears impervious to all of the shocks it has been subjected to.
- The stock market has been reacting to a trifecta of economic shocks
- The billionaire founder of Chinese property giant Evergrande is under police surveillance
- Private equity firms are taking on more debt, paying worrying levels of interest rates
News in Review
Below are some stories that caught our eye this past month. To learn more, follow the links to the full article.
Rising oil prices, rising bond yields, and threats to economic growth, from a government shutdown to the potential for large workers strikes, all combined together to create a perfect storm for investors in September. None of those issues on their own would cause a recession under normal circumstances, but together they increase the risk of one. Fortunately, resolution of any – or most – of those issues could also decrease the risk to the economy, and could be a catalyst for another stock market rally.
Evergrande’s Billionaire Founder is Under Police Control
The second-largest property developer in China was worth as much as $54 billion in 2017, but 6 years later it is worth less than $1 billion. In a new development, the billionaire founder of this economically important Chinese company is reported to be under the control of the police. It is unclear what that means exactly other than he is under surveillance and has been placed in a designated location. This is yet another sign that the Chinese economy is under stress, as properties are the main source of wealth for many of their citizens.
Private equity firms have the lowest levels of cash on hand since 2008 and have been borrowing to meet their commitments – in some cases at interest rates as high as 19%. Given that companies that issue “junk” bonds are paying 10%, a rate far above that is concerning and reflects the risk inherent in the companies that have to pay such high levels of interest expense. The amount of leverage involved is raising alarm bells for some investors, however, the
risk varies greatly based on the PE firm that is doing the borrowing.
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S&P 500 INDEX: The Standard & Poor's 500 Index is an unmanaged, capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NASDAQ 100 INDEX: The Nasdaq 100 Index is an unmanaged, capitalization-weighted index of the largest 100 non-financial stocks traded on the Nasdaq market. Unlike the S&P 500 it does not represent all major industries and may be more volatile than more broadly constructed indices.
MSCI ACWI INDEX: The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 24 emerging markets (EM) countries. With 2,495 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index: The Bloomberg U.S. Aggregate Bond Index is a broad-based index of the U.S. investment-grade, fixed-rate bond market, including both government-related and corporate securities and mortgage-backed and asset-backed securities.
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