Will The Stock Market Bounce Back? Show 68

While September is great for apples, it is turning out to be a rough month for the stock market, and the culprit is multi-faceted. It’s easier on the mind when we can point to one thing that’s causing a disruption, but this time we’re not that fortunate. 

Over in China, a large property development company called Evergrande is on the verge of default, and from my research, their overuse of leverage is a major contributor. The company agreed to the use of highly speculative development projects and in recent years ventured into business sectors outside of their expertise. Because world economies are interconnected and dependent on one another, this appears to have caused uncertainty in world financial markets. 

A research company, Emerging Portfolio Fund Research, Inc., stated last week that “Almost $62 billion was pulled from cash accounts in the week of September 15th. Of that $51.2 billion went into equities, $16.1 billion into bonds and $37 million into gold.” Much of this appears to be motivated by the expectation that the Federal Reserve will continue its easy money policies, but that’s not what the Fed is signally. 

The head of the Fed has said they may begin tampering or reducing the amount of bonds the government is purchasing. The bond buying program is one of the leading factors causing higher inflation. The government has no money. What do they do? They print money or borrow money for any venture the government undertakes. Taxes are not enough to cover government spending. So, the government creates money to buy its bonds. Thus, driving down the purchasing power of our money. When there’s more of anything, it’s worth less. In stands to reason, when there is more money in circulation, it devalues current dollars. This is government induced inflation. 

This has worked out to a degree for equity investors because the market has gone straight up for more than a decade. A stock market crash would be devasting for people overly exposed to equities because it will be a double hit due to inflation. If portfolios are depressed and inflation is rampant, it could majorly impact purchasing power.

I’m always happy to discuss the topics I’ve discussed here further, answer any other questions, or share how we serve our clients. You may reach me at 864.641.7955.

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