Chinese construction giant Evergrande is flirting with default on its $300 billion of liabilities, which would be one of the largest in the history of the world. Predictably, this possibility has injected volatility across global markets.
While Evergrande debt has always carried a low junk rating, and investors were acutely aware that they were taking a big risk, the fears of a potential for spillover effect of an Asian-contagion to markets comes at a time when market participants were already pulling back on risk exposures. The soft August jobs report has folks nervously watching the Fed meeting this week and the economic projections that accompany it (inflation forecasts, potential taper timing, plot-dot timing of future rate hikes, etc.).
With risk assets at historically expensive levels, markets are ripe for a pull-back, and any of these could serve as catalyst for sentiment to turn…or not...markets could just as easily melt up from here for a time. Either way, for investors with a long-term orientation the chart below offers some perspective:
This is the S&P 500 price for the last 150 years, on a log scale (the data comes from Robert Shiller at Yale). The period above encompasses world wars, market bubbles & crashes, inflation, stagflation, rising and falling rate environments, and so on. The ride is a bumpy one, and investors can get caught up in the shorter term ups and downs, but equities markets have been an unbelievably powerful wealth building machine…the catch is you have to own them over time to reap the rewards. We know that being broadly diversified (across geographies and risk factors) puts the odds in your favor, but we believe being disciplined and patient are the true keys to investing success.
Regardless of how it eventually plays out, Evergrande will fade into memory, the Fed will eventually taper, rates will rise/fall/rise again, and life will go on.
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Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.