September 24th, 2021
It was a roller coaster ride for markets as various headlines dominated the tape in an otherwise light week for economic news. Monday kicked off with a broad market sell-off which sent the Dow Jones Industrial Average down 614 points. The sell-off was sparked by investor fears that trouble in China’s property market could lead to contagion across global financial markets. Traders were particularly concerned about the financial health of highly levered China Evergrande Group which has a reported $300 billion in liabilities on its books. The property developer was teetering on the brink of collapse, facing an $83 million loan payment. That event was touted as China’s Lehman Brothers event, having the potential to cause a domino effect in China and, some said, globally. Fortunately, the company was able to avoid defaulting on its debt this week with lenders giving a 30-day grace period. Activities on Capitol Hill also pinched a nerve with investors this week as Democrats and Republicans continued their showdown over a fiscal spending package and a debt-ceiling extension. Failure to extend the debt-ceiling could force a government shutdown and hamper U.S. economic growth. Despite these headlines, markets were able to regain their footing as dip buyers sought to take advantage of the early week sell-off, sending the Dow up 338+ and 506+ points on Wednesday and Thursday, respectively. Investors appeared more confident that China’s debt issue will be contained and that lawmakers will ultimately put aside their differences on the debt ceiling to avoid the pain of not doing so. With traders glued to the other headlines, not much attention was paid to economic news. The Federal Reserve held its FOMC meeting, stating that it remained on track to taper its bond buying program later this year and to begin to hike interest rates in mid-2022. Housing market data was mixed as existing home sales dropped while new home sales rose in August. As the dust settled on Friday, the Dow Jones Industrial Average managed to close the week in the green, up 0.62%.
Fed Gives Upbeat Economic Outlook as it Looks to Start to Wind Down Stimulus
Prior to being upstaged by Evergrande and Congress, the Federal Reserve’s FOMC meeting had been primed to be this week’s main event. Traders have been waiting for weeks to get more details on the Fed’s timeline to wind down its pandemic-era stimulus measures. Although the central bank stopped short of giving a precise timeline to dialing back its stimulus, it did signal it remained on track to begin reducing its bond-buying program later this year as the economy has made substantial progress towards both its inflation and employment goals. Markets seemed to take the news in stride with the Federal Reserve maintaining its benchmark interest near zero and by indicating a rate hike would likely not occur until mid-2022. Investors also cheered the central bank’s relatively upbeat economic outlook. The Fed expects GDP to rise 5.90% this year and 3.80% next year. That’s well above the 2.00% pre-pandemic normal. Meanwhile, it expects inflation to hit a 4.20% peak this year before dropping to 2.20% next year. Assuming the projections hold, the strong economic growth combined with low inflation bodes well for both businesses and consumers as it provides more money in their pockets to further fuel spending. Low inflation also gives the Federal Reserve more room to maneuver as it looks to remove its monetary stimulus measures without sparking a taper tantrum in financial markets.
Lack of Existing Homes Push Homebuyers into New Homes
Once again it was a tale of two housing markets as existing home sales dipped as new home sales rose in August. Sales of existing homes fell -2.00% month-to-month, driven by a lack of supply which continued to send prices higher. The median price of an existing home hit $356,700 in August, up 14.90% from a year ago. Prices have increased sharply as strong activity at the higher end of the market drives up the median price and as inventory has dwindled. The supply of homes for sale dropped -1.50% month-to-month to 1.29 million homes. At the current sales pace, that represents a 2.6-month supply. That’s well below the six to seven months supply which is considered to be a healthy balance between supply and demand. However, there are some signs the existing home sales market is beginning to cool. The market appears to be less competitive overall with buyer traffic declining and the number of buyers waiving inspections, a competitive tactic, also dropping. The number of offers on a typical home is also falling, declining to 3.80 compared with 4.50 a month ago. A lack of inventory continued to push homebuyers into the new home sales market, sending sales of new homes up for the second consecutive month. Sales rose 1.50% in August to an annual rate of 740,000 as the median price hit a record $390,900.
Watching the market’s response to headlines this week reminded us of being kids and watching the old DC comics Bizarro World – a parallel universe where everything is vaguely familiar but exactly opposite of what one knows from the past. In 2008, it was our domestic real estate market and the vortex created by the collapse of Lehman that crippled the U.S. financial system, while China sailed through relatively unscathed. Thirteen years later, it is Chinese real estate and its nation’s largest real estate debt issuer, Evergrande, that now teeters, with the U.S. economy watching from the sidelines. In 2013, U.S. markets experienced a Taper Tantrum, a reactionary panic and sharp spike in interest rates that occurred after investors learned that the Federal Reserve planned to curtail its bond buying program in the “future”. Today, markets couldn’t be more accommodating to the Fed, somehow feeling Powell this time around channels Bernanke’s old script. Kent Clark meets Clark Kent.
That is not to say there were not some volatile moments. Markets did manage to fall 5% from highs at one point this week. This was the first such retrenchment since October of 2020, and it comes as the list of headwinds facing markets right now are many and growing. These now include delta and its supply chain disruption, inflation, the debt limit standoff, Fed tapering, an expensive market and China’s overheated debt market. All of these were paraded out for investors to wring their hands over but at the end of the day they still pale when compared to the current economic path. Dip buyers, however, saw this as their first opportunity in quite some time and managed to jump in, salvaging the week for investors.
The Week Ahead
Markets will seek to finish Q3 2021 on a high note with key reports on personal income, consumer spending, and manufacturing.
The “Weight” is Finally Over
The world is just days away from the start of something big. Every fall, the Katmai National Park and Preserve in southern Alaska celebrates its most fabulous and fattest brown bears with its “Fat Bear Contest.” Now entering its eighth year, the contest is a March Madness-like game created by park rangers who pit pairs of about 40 bears against each other and then let the public choose their favorite through online voting. The bears are assigned numbered names, like 480 Otis, so that they can be identified and monitored.
The contest will be open for voting beginning next week on Tuesday, September 29 — the official start to Fat Bear Week — and will continue to October 5th when the heavyweight is named. Voters can watch live webcams of the big bears here and compare before and after photos of bears from their thinner summer bodies to their winter-ready mass.
The average adult brown bear weighs around 600-900 pounds in the summer before putting on their winter weight when they can weigh more than 1,000 pounds by November. During hibernation, which can last for five to eight months, a bear can lose one third of its body mass, making the weight a bear gains before all the more important. Bears must eat a full year’s worth of food in the summer and fall months to ensure survival and can put on up to four pounds of weight per day.
Voters can read detailed biographies of each competing bear here to learn about each bear’s unique personality and behavior. The 2019 winner, 435 Holly, won over fans with her strong maternal instincts, having reared multiple litters of cubs and adopting a lone cub that she raised alongside her own. The 2020 winner, Bear 747 – aptly nicknamed “Bear Force One,” was estimated to weigh 1,400 pounds. Park rangers use 3D scans (from a safe distance) to estimate a bear’s weight, however, Holly’s weight was unknown because, being a competitive champion, she was focused on fishing and never out of the water long enough for a good scan.
Katmai National Park encompasses about 4 million acres and is home to about 2,200 brown bears. The Fat Bear Contest has grown in popularity with more than 640,000 people casting votes for the fattest bear in 2020 compared to around 200,000 votes the previous year. Park rangers expect even greater interest this year. The bear-cams alone attract nearly 20 million viewers from around the world. A new competition was announced for 2021: the Fat Bear Junior competition which is affectionately nicknamed the chubby cubbies. During this warm-up event, the public chooses the cub who they think should compete in the Fat Bear tournament. Fat Bear Junior culminates today, September 24. You can learn more at fatbearweek.org including who will win the Junior title when it is announced. The National Park Service offers a helpful Q&A on the Katmai bears here.