Monday Market Update 9-20-2021

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The market continued to falter last week in the face of a series of rising concerns: slowing economic recovery, persistent inflation, Delta variant and now, potential wider-spread financial concerns from the meltdown of a major Chinese commercial real estate developer. Catch all the details below or listen on this week’s episode of Finance Explained.

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Last Week in the Market

Last week, the market continued its September slide as economic data continued to show signs the economic recovery may be slowing and inflation may be more persistent than anyone had hoped.

The market finished last week down 0.57% for the week, it’s second down week in a row, and the market is now down nearly 2% for September (and more through the end of Monday).

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Three economic data releases came out last week:

• August 2021 Consumer Price Index, a measure of consumer price inflation
• August 2021 Retail Sales
• Weekly Jobless Claims for the week ended September 11, 2021

In addition to the economic releases, two other major stories weighed on the market:

• House Democrats put forward their proposed tax increases pushing higher rates on corporations, investors and high-income business owners to fund their desired expansion of social benefits and climate change initiatives
• The potential default of the most indebebted property developer in the world (and the second largest developer in China), Evergrande

More on all these stories below or get the full update on this week’s episode of Finance Explained.

August 2021 CPI: +5.3% over the last year

Last week, the Bureau of Labor Statistics released the August 2021 Consumer Price Index, one of the measures the market follows to measure inflation.

While the Fed has continued to hold that the elevated levels of inflation we are currently experiencing are just “transitory,” the more months where they remain significantly above long-term inflation targets, the more concerned investors become.

August CPI was up +5.3% over the last year. Initial reactions were positive, as that was down from the +5.4% reported in July, but still is more than double the Fed’s 2% long-run average target.

Also, if we compare current price levels to more “normal” price levels, pre-pandemic on an annualized basis, we still see elevated levels of inflation, especially in food and energy prices, which significantly impact prices consumers pay.

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Prices are rising most in food, energy and durable goods, like cars, largely due to increased demand paired with supply chain constraints.

August 2021 Retail Sales: +0.7% vs. July

Each month, the US Census Bureau reports Advanced Retail Sales. These numbers are reported on a seasonally adjusted and annualized basis, accounting for variations in the number of days in a month, holidays, and to give an indication of what the annual run-rate would be if that month’s sales were extrapolated for a full year.

Advanced retail sales are a strong leading indicator of overall consumer spending, which remember, drives 2/3s of our overall economy.

August retail sales were up +0.7% vs. July, and July numbers were actually revised down from the prior month’s data release. August sales were driven by strong back-to-school sales, but hindered by Delta variant concerns, as restaurant numbers were flat, and by supply chain constraints, which drove down auto sales due to limited inventory.

Food and beverage store sales were up +1.8%, but it’s important to note that these numbers are not adjusted for inflation, and food prices could be driving a significant part of that increase.

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Weekly Jobless Claims for 9/11/2021: 322,000 new claims

Weekly jobless claims continue to decline and come in at new lows since March 2020… but are still elevated relative to long-term averages and pre-pandemic levels.

For the week ended September 11th, the first week following the end of expanded and extended federal benefits, new initial jobless claims were 322,000, while continued claims for the week ended September 4th were 2.7 million, a 1.9% insured unemployed rate.

We did see a sharp drop in initial claims under the Federal Pandemic Unemployment Assistance program – new claims can still come in for weeks of job loss prior to the September 4th cut-off date, which accounts for the small number of claims we may still see going forward.

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Insured unemployment and continuing claims under all programs comes at a 2 week lag, so this data is through August 28th, prior to the end of the federal programs. At that point in time, 78% of continued claims benefits were under the Federal PUA (for those who may not previously have been eligible for state benefits, like self-employed and 1099 workers) and PEUC (for workers who have exhausted the max weeks of benefits under state programs) programs.

Pandemic Update

There have been concerns over the last few months that the Delta variant and rising hospitalizations might slow the economic recovery… some good news on that front is that new cases seem to potentially be slowing down again, and relative to new cases, hospitalizations and deaths seem to be declining as well.

Vaccinations also continue to increase, albeit more slowly than last spring. Currently, nearly 75% of those over the age of 12 (the eligible population) have received at least 1 dose.

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Recent increases in vaccine mandates for federal and state employees, as well as a new federal rule proposed by President Biden and to be enforced by OSHA calls for all businesses with more than 100 employees to require vaccinations. Last week, a consumer brands group, which represents thousands of companies, sent President Biden a letter with a laundry list of questions on how this rule will be implemented and enforced. In addition, 24 state attorney generals, from Republican states, have threatened legal action against the vaccine mandate.

Democrats Propose Tax Increases

The other major headline of last week weighing on the market – proposed tax increases outlined by the House Ways and Means Committee. This is to increase revenues to pay for the higher spending also being proposed.

The proposal includes tax increase for corporations, “high-income” individuals, and modifications to rules relating to retirement plans.

• Increase the corporate tax rate from 21% to 26.5% for businesses with income over $5 million
• Increase the top marginal individual income tax rate to 39.6% (from 37%) for those married filing jointly earning more than $450,000 or for single filers with income over $400,000
• Increase capital gains rate on investment income from 20% to 25% for all gains from here forward (based on date of introduction so investors can’t rush gains now to pay lower taxes)
• Prohibits contributions to a Roth or traditional IRA if retirement accounts exceed $10 million and in highest income tax bracket
• Eliminates back-door Roth IRA strategies for those in the highest income tax bracket

In general, raising taxes on corporations directly reduces future company earnings. Stocks trade based on expectations of future company earnings, so this proposal, if passed, would negatively impact trading values. Higher taxes on investment gains could also impact investor returns, and change investment strategies.

It is important to note that this is just a proposal at this point, and has to pass both the House and the Senate to become law. The Senate faces a larger hurdle, and will be trying to pass this legislation through budget reconciliation, requiring all 50 Democrat Senators’ support… and so far, Senator Joe Manchin (D) isn’t in favor.

Related Post: What Drives the Stock Market?

Evergrande Woes Have Global Market Impact

Last, but not least, Evergrande. Why are global markets so worried about a single company in China?

China Evergrande is the second-largest property developer in China and the most indebted property developer in the world. Founded in 1996, the company borrowed to fund its rapid expansion, covering more than 1,300 projects in 280 Chinese cities. The company faces debt obligations this week – both interest payments and maturities coming due – that it can’t pay.

Evergrande reportedly has over $300 billion in debt obligations and less than $15 billion in cash on hand. Last week, the company’s bonds were trading as low as $0.25 on the dollar. Some have speculated that the Chinese government would deem the company too big to fail, and bail them out, but Chinese authorities have so far indicated the company would not be meeting its debt obligations.

This has spillover effects in markets globally. Many investors, including here in the US, seeking higher returns in the midst of a low-interest-rate environment, have increasingly invested in emerging market stocks and bonds, like those of Evergrande.

Others also worry the failure of Evergrande could spark a broader financial and economic crisis in China’s banking and financial sector, ala Lehman Brothers in the US in 2008. However, experts point to the fact that as a property developer, Evergrande has real physical assets – not just financial securities – backing its debt obligations.

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This week in the markets, we will continue to watch the Evergrande situation, as well as the progress in Congress on the House’s spending bill. On the economic front, we will see data on the housing market, including housing starts and existing home sales for August, as well as hear from the Fed following its latest FOMC meeting.

Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.

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