Investing

Dow Falls Again After Evergrande Sparks Market’s Worst Day In Months. What Happens Next?

Topline

Stocks struggled to pare losses Tuesday after concerns that the world’s most indebted property developer may start defaulting on its debt sparked the market’s biggest selloff in months, but many experts remain confident stocks will rebound in the United States, given strong economic momentum as the pandemic eases.

Key Facts

After plunging 615 points in its worst daily drop since July, the Dow Jones Industrial Average ticked down 50 points, or 0.2%, on Tuesday, keeping it nearly 5% below an all-time high from last month.

Meanwhile, the S&P 500 fell about 0.1%, and the tech-heavy Nasdaq added just 0.2%; both indexes posted their biggest declines since May on Monday, falling 1.7% and 2.2%, respectively.

In a Tuesday note, JPMorgan chief global strategist Marko Kolanovic called Monday’s selloff an “overreaction,” fueled largely by rattled traders, and doubled down on his bullish market forecast, saying the S&P could still rise another 9% by year’s end.

He says the Russell 2000, an index of corporations with small market capitalizations, was relatively resilient on Monday and remains in a long-term uptrend, a good sign for the broader market, given that small-cap stocks generally lead larger indexes, he adds.

Though several Asian markets remain closed this week until Wednesday, Hong Kong’s benchmark stock index ticked up 0.5% on Tuesday, though it remains down about 12% this year.

Crucial Quote 

“As long as Covid continues to ease, strong momentum should continue into 2022 as businesses start to rebuild depleted inventories and ramp up [spending],” Kolanovic said. “Central bank policies should remain growth-oriented, and even China’s slowdown is likely to be countered soon with a policy pivot.” 

Key Background

China’s second-largest property developer Evergrande has amassed a staggering $300 billion in debt to help finance its sprawling portfolio of lofty projects since its founding 15 years ago. Battered by the nation’s slowed economic growth, however, the company told banks last week it would be unable to make debt payments due this month, sending its shares tumbling and sparking a sharp drop in the Chinese real estate sector that quickly spread across Asian markets. With some 1,300 real estate projects in China, Evergrande employs about 200,000 people and says it creates roughly 2 million jobs every year through its projects. Shares of the company have plunged more than 80% this year. 

Tangent

In a letter to employees Monday, Evergrande’s chairman said the company will “walk out of its darkest moment” and fulfill its obligations to investors, partners and banks. 

What To Watch For

Though U.S. stocks were largely unfazed by the turmoil last week, they quickly sank Monday after reports emerged warning Evergrande could miss out on an $84 million interest payment due this Thursday and trigger a default that would undeniably have damaging ripple effects, given the developer’s sheer size. “What happens on Thursday promises to be a seminal event for markets, one way or the other,” Ray Attrill of National Australia Bank, told CNBC.

Tangent

Many experts initially worried Evergrande’s potential collapse could mark a seismic economic shock akin to those that fueled the Great Recession, but increasingly since Monday’s selloff, analysts have changed their tune. LPL Financial’s Ryan Detrick, for instance, acknowledged Evergrande’s liquidity crisis could be “enormous,” but said it’s likely the Chinese government would intervene in order to prevent any systemic damage. In a Monday evening note, Wedbush analyst Dan Ives said the selloff creates a buying opportunity in tech stocks like Apple and Microsoft, which fell Monday but are now on the mend. “While the bears will worry about the impact this issue will have for Chinese growth and global markets, our multi-year bull thesis for tech stocks remains firmly unchanged,” Ives wrote.

Further Reading

Hong Kong Stocks Mixed; Evergrande Falls, Casinos Rebound, EV Makers Slide (Forbes)

Dow Plunges 600 Points To Lowest Level In Two Months As Experts Fear Great Recession-Style Collapse With Evergrande (Forbes)

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