On September 20th we saw a really bad day on Wall Street. At one point the Dow Jones was down over 900 points or over 2%. Yikes. So why?
The headlines were about Chinese developer Evergrande Group warning about cash flow problems. However, this is too simple of an explanation. There are a few things going into this skittish stock market, I’ll unpack a few.
Debt Ceiling: We’re closing in on a possible government shutdown due to the debt ceiling. I personally believe we will see another government shutdown, and get ready to short the market when that happens.
Federal Reserve Tapering: The Federal Reserve is also getting more vocal around gradually reducing the number of Mortgage Backed Securities it’s willing to buy. In the recovery from the great recession, we had what got adorably dubbed “taper tantrums” in the stock market as the Federal Reserve started to pull back their level of support. They’re talking that talk again.
Supply Chain Issues: We’re seeing supply chain issues across the board. Have you seen how empty the new car lots look in your cities lately? I had to buy a new car this month and asked about a test drive. They literally said, “Sorry, we don’t have any Chevy Tahoes.” Huh? Chevrolet is out of Tahoes? It was the same at every dealership I called. This is putting massive upward pressure on price across all categories which is resulting in inflation (see below).
Inflation Concerns: Sure, prices are up across the board. That is to be expected when supply is so low. However, we’re also starting to hear something we haven’t heard since the 70’s. No, not a resurgence in Disco (though that could be fun right?), but the dreaded stagflation. Normally, inflation comes from a robust economy and people feel rich so they’re willing to spend more for things. Stagflation is when the economy is stagnant but prices keep rising.
To break it down simply, the stock market is as nervous as a dad with pretty daughters (trust me I know this fear). It’s been on an upward trend for an incredibly long time. It seems to be immune to any news. Good news comes out and we hear, “See, told you everything is fine.” Bad news comes out and we hear, “It’s ok Uncle Fed has our back.” Either way, in the back of our minds we know we’re due for a correction. I’m not saying recession is imminent, but I am saying some pullback in the stock market would be a healthy thing. Also, the market knows it.