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Should We Be Worried About An Upcoming Financial Crisis?

  • October 21, 2021
  • Front

The last couple of years have been filled with globalized events that have impacted the world as a whole. Most notable among these was and, and still is, the Covid-19 pandemic, which of course had implications beyond just health, but impacted global economies in countless ways.

This is accompanied by other world events ranging from political to financial—encompassing everything from elections, short-term market crashes, unemployment, meme stocks, stimulus checks, the US debt ceiling, massive Chinese companies (*cough* Evergrande) defaulting on their debt…and, of course, cryptocurrency. 

These events can understandably scare us, and maybe even make some investors worry about a financial crisis cropping up because of them.  

Before we go that far, though, we might consider this.

All of these are noteworthy happenings and worth being concerned about, but it is also worth noting that trying to accurately predict a global financial crisis is not something most of us should venture to undertake. It always seems like the end of the world, until it isn’t. We can do nothing better than just be prepared, and analyze objectively. 

That being said, here are a few things investors can keep a watchful eye on.

China & the Evergrande situation

Evergrande is a Chinese real estate Frankenstein–at least, it used to be. Evergrande has stretched itself thin over numerous industries, beyond just real estate development, with a hand in everything from wealth management to EVs. They’re also publicly traded, on the OTC that is, for about 35 cents a share (at the time of writing). 

Oh, and they have over $300 billion in liabilities. Last year they reportedly generated “only”  $77 billion in revenue, and they’re now falling behind on payments. At the end of September, they missed an $83 million dollar interest payment to overseas bondholders, and October balances remain outstanding too. 

Why does this matter? China invests a lot of money into real estate, even more than the US. So, the Chinese real estate market is very valuable and many rely on it. Evergrande, with its 700+ ongoing projects, risks causing a contagious default that could spread throughout one of the world’s largest economies. 

China’s Evergrande debt crisis. [Via WSJ]

The risk of real implications reaching the US in a way that makes a big dent seems to be slim, but, as we’ve seen, even just the suggestion of it was enough to spook the markets recently. So, it’s something worth keeping an eye on. 

US stock market prices

The stock market has been high-flying since the pandemic flash crash it experienced briefly last March, when multiple indices fell by over 10%. What followed would be a V-shaped recovery that sent the market back to and above previous all time highs, and took several multiples and ratios with it.

This has led some prognosticators and analysts to believe the market could be in a precariously overvalued position, or that some kind of crash is necessary. The reality is that we don’t know, but we can look at some numbers. 

  • The S&P 500, for example, currently trades around an approximate P/E ratio of 34. While this isn’t anything compared to the 2002 and 2009 P/E spikes that we saw, due to earnings temporarily contracting, it’s still a stretch above the average ratio of 21.92 we saw between 1981 and 2020. 
  • The Buffett Indicator also finds itself deep in the red as well, at 232% total market cap to annualized GDP ratio. 
  • Margin continues to climb as well, finding investors borrowing more than ever to trade.

Investors credit & the market [via Advisors Perspective]

Obviously though, all of these indicators have their own limitations and caveats the same as any ratio we use to try and value the market, and these are just some observations made by other sources who may believe the market is presently overvalued. 

Those things noted, the US stock market is no stranger to all-time highs. Actually, since 1950, the US stock market has collectively set over 1,000 all time highs, averaging about 16 per year. Broadly speaking, the market as a whole trends upward over long-term timelines. (BUT! This does NOT mean stocks only go up. 😅)

Whether the market is valued properly is not for us as investors to decide. We know that time in the market beats timing the market, and that the stock market is an emotional being that ebbs and flows with economic cycles and countless other variables. 

The real estate market

The real estate market has arguably been favoring sellers for over a decade now, and we’ve continued to see even more variables influence the market to reach higher highs over the last 18 months or so. 

A white hot housing market has led some to be concerned we’re in another housing bubble that could eventually burst. Why?

Here are a few reasons. 

  • Supply: Per the Wall Street Journal, US home builders built 276,000 fewer homes a year between 2000 and 2020 compared to 1968-2000. Of the homes being built, so-called “entry level” homes (defined as less than 1,400 square ft.) are becoming more scarce, having gone from making up 40% of new homes in 1982 to just 7% in 2019
  • Demand: The demand for houses has only increased alongside a drop in supply. A US Census found that there were over 12 million new American households between 2012 and 2021, but only 7 million new single-family homes. On top of that, demand has risen aggregately as Americans also added $3.7 trillion to their savings during the pandemic. These spikes in the personal savings rate that occurred as a result of stimulus and lockdowns have increased the ability of certain Americans to afford a down payment, thereby upping the housing demand too. 
  • Rates: Both in the near and long-term, mortgage rates are at a relative rock bottom–meaning the cost of interest is cheaper than ever, making it more appealing to apply for a loan. 

Make informed investment decisions

At the end of the day, there will always be threats to the market, and trying to perpetually time them usually proves to be an exhausting and sometimes fruitless endeavor. With other concerns like tapering, bond yields, or rate hikes all looming on the horizon and demanding to be faced eventually, we can easily see how there’s never a perfect time to invest. 

It’s always good to stay informed, just don’t let that information overload push you toward analysis paralysis when investing. As long as we consistently take measures to ensure our investment decisions are sound ones, that can be one of the only things to provide peace of mind amidst the headlines. 

Evaluate your holdings on a fundamental level, understand what you own, only invest what you’re comfortable losing, and oh, check your Front Score to see how your portfolio stacks up. 😉

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