And we’re back. Last Tuesday the markets began to recoup the losses of the last two weeks. The S&P 500 is down for the month, but still has strong gains for the quarter and year to date. The Federal Reserve Bank has stated they will begin to reduce bond purchases, as the economy has begun to stabilize.
The biggest worry last week was the default by the Chinese real estate company Evergrande Group. The company has borrowed aggressively as it helped to fuel the country’s building boom. The Chinese government has begun cracking down on companies that have what it feels are excessive debt. Evergrande has about $305 billion in debt according to Fast Company. An $83.5 million payment was missed last week. Technically, they have a 30-day grace period and aren’t officially in default.
The concern is that the default would cause a ripple affect across institutions, similar to the default by Lehman Brothers in 2008. The big difference is that Evergrande’s debt is not as widespread. In addition, China retains strong regulatory control over its financial institutions. It is unlikely they would allow those institutions to call the debt and trigger a full collapse. A restructuring is much more likely.
The market had largely already adjusted valuations on the basis of the looming default. Remember that stock prices are forward-looking, and this debt crisis by Evergrande was widely known. We may see ripples across China’s economy and that would trickle out to emerging markets, but a full repeat of the 2008-09 financial crisis is unlikely.
In addition to all of this, the US is facing another government shutdown if the two political parties can’t manage to compromise and pass a spending bill. This is a great reminder that, no matter how secure your job is, you still need three to six months of living expenses in liquid, or easily available, assets.
Your action to take this week is to change the filter on your HVAC system. Dirty filters can strain your system, increasing wear and tear and electricity costs. You can also register for more educational events on our website at covingtonalsina.com. Be sure to check out our Facebook page for more information.
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