3 Reasons Why the Latest Market Weakness Might be a Buying Opportunity

Since September started, global stock markets have been on a downtrend amid the confluence of multiple negative catalysts including a looming crisis in China’s real estate sector, ongoing discussions about raising the US debt ceiling, the possibility of a government shutdown, and a raging spread of the Delta variant in multiple corners of the world.

Thus far, the S&P 500 index is down 1.5% for the month while the MSCI Global Stock Market Index has dropped a similar 1.2%.

Moving forward, is this drop presenting itself as a buying opportunity? In the following article, we will share 3 reasons why the answer to that question might be “yes”.

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#1 – Debt Ceiling & Government Shutdown – Not the first time

Yes, a government shutdown sounds like a scary thing and it does have an impact on the average citizen as multiple social programs are disrupted when this situation occurs. However, for the stock market, this event has never had a long-lasting impact on its performance.

The government has shut down a total of 20 times in the past and broad-market indexes in the United States have continued their uptrend despite what happened.

Moreover, on the debt ceiling front, both Democrats and Republicans seem to share the view that the United States must never default on its debt as that could have catastrophic effects on its domestic economy and on the stability of the global financial system for that matter.

“The debt ceiling needs to be raised. The issue is who should do it”, said Senate Minority Leader Mitch McConnell in regards to the fact that Democrats can easily make that decision on their own.

It seems that a stand-off in this particular front will not move beyond some political theatrics and, once the issue is resolved, stock markets should recover from their early-September weakness.

#2 – The Evergrande Crisis – Not that “grande”

The situation in the Chinese real estate sector is quite troubling amid the seemingly imminent debacle of the country’s largest developer, Evergrande, which has collapsed under the pressure of over $300 billion in liabilities.

For China, Evergrande’s collapse could be a big deal as many banks are heavily exposed to the company and its default could lead to instability in its financial system.

However, for the global financial system, the Evergrande crisis might not be as worrying as it seems as US banks have mostly stayed off loaning money to Chinese companies amid regulations that prevent them to do so.

Therefore, it seems exaggerated to label Evergrande as a “too big to fail” institution on a global scale amid the limited impact that its debt may have on the largest financial institutions of the world.

#3 – No taper from the Fed thus far

It is not a secret that markets have managed to recover from the hit they took during the pandemic crash of February-March 2020 amid the injection of trillions of dollars in liquidity from a large group of central banks around the world including the almighty US Federal Reserve.

Lately, a seemingly accelerating inflation rate in the country and the apparent strength of the US bourse has led to discussions about an upcoming tapering of the central bank’s $120 billion monthly asset purchases.

However, the Chairman of the Fed, Jerome Powell, stated this week that officials are just starting to discuss the possibility of tapering. This means that it could be months before tapering actually starts and even if asset purchases are taken down a notch, there is no evidence that the Federal Reserve will either raise its benchmark interest rates or cut back on its balance sheet.

Tapering will only slow down the rate at which the institution’s balance sheet will continue to grow in the future.

As a result, the trillions of dollars the Fed has injected into the economy will remain there, probably for a long time, and that kind of money supports the continuation of this post-pandemic rally.

Bottom line

These three reasons sound like very simple arguments to justify a further increase in stock market valuations. However, the continuous intervention of the Fed in the financial markets and the seemingly temporary nature of the events concerning the Evergrande crisis and the debt ceiling and budget situation are making the case for bulls as we head to the last quarter of the year.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes