September Blues (maybe)
Historically, September has been a bad month for the market, and this year, it appears to be on the same path. The S&P 500 was down ~5.4% since the high on Monday (9/20). The market was concerned about the most prominent Chinese property development company (Evergrande) being on the brink of bankruptcy. The company will likely default on $300 billion in debt next week. The market fears the default will spread through Asia like the 1997 Asian financial crisis. Evergrande has a liquidity issue but should be able to complete its projects with government assistance.
On Wednesday (9/22), Federal Reserve Chairman Jerome Powell addressed the Evergrande issue as “particular” to China. He also stated that China has been tightening its lending standards to reduce the amount of debt the country relies on for growth. Chairman Powell reiterated that the FED would reduce the amount of debt it purchases on the open market. However, it is probably a year plus before they start to increase the FED Funds rate. This news helped investor sentiment, and the S&P 500 rallied ~2% today (9/23).
Below is a very interesting 60 Minutes Australia video on real estate development in China.
BlackRock’s iShares High Yield Bond ETF (HYG) was the best performing last week. HYG tracks the iBoxx high yield corporate bond index. All bonds in the index are below investment grade and mature between one and 15 years. The index weighs bonds based on their market value. Therefore, companies with the most debt will have a larger representation in the ETF.