It's a Dip to Buy

Macro Perspectives: Tue 21 Sep 21

We head into a big Fed meeting this week, and to start the week, global stocks sold off across the board. So did commodities.

The “risk” focused on by the media was Evergrande, the real estate giant in China that is effectively in default. We discussed this Evergrande risk last week - with $305 billion in liabilities there is speculation that it could melt the financial system in China (like a Lehman moment). However, this "free market" type of outcome is very unlikely.

China is in a position of strength globally, coming out of the pandemic, and the Chinese Communist Party is nationalising parts of the economy (taking more control). Intervening and controlling outcomes is what they do - we should expect the government to manufacture whatever type of outcome it wants.

That said, if we look at the markets for clues about the perception of systemic risk in the world, the first place to look is the U.S. bond market (the safe haven for global capital in times of risk). While yields moved lower during the day (yesterday), the move was relatively muted (down 5 basis points), holding and closing above 1.30.

This should tell us that investors around the world did not panic and it may tell us that the bigger issue for stocks, at the moment, is the change in policy direction that the Fed is due to make on Wednesday.

As we've discussed, the Fed has laid the groundwork to announce a plan to taper the QE program, and as we've also discussed, monetary policy will remain extremely accommodative for quite some time, even after they begin to raise rates (which will be at least six months away). Meanwhile, the stimulus from the fiscal side is only getting more extreme. This combination will continue to fuel stock prices through (at least) much of next year.

In the meantime, we're getting a 5% decline in the broader market, which will be a dip to buy. Let's take a look at the chart...

As you can see stocks broke below the 50 Day moving average - acting as big uptrend support from election day. That election day trend was fueled by the expectations of continued easy money and an unimaginably big fiscal spend.

We now have a 5% decline. A slide down to, and slightly below, the 200-day moving average would represent a ~10% correction. This type of move could happen, and happen quickly, but in a world awash with liquidity and intervention, the history of the past thirteen years shows us that the recovery can be just as fast.

It's a dip to buy.