The stock market endured a choppy September. The S&P 500 slid for the month, nearly wiping out all of Q3’s gains. Many analysts cited the debt ceiling drama and/or economic issues emerging from China as causes for the volatility, but I generally refrain from assigning causes to short-term volatility. The market may be responding to those issues, or there could be other risks and factors in play. Over short time frames, no one truly knows.
Longer-term, however, I do think there are a few budding risks to keep an eye on. So as not to bury the lead, I believe the U.S. economy is in a strong enough position to overcome these headwinds. But I also think investors should be mindful of these risks while also ensuring you are managing risk appropriately in your portfolio. The tools we use here at Zacks Investment Management range from proprietary stock screens, to ongoing earnings and earnings estimate analysis, to diversification and constant portfolio monitoring. As you consider these three risks to watch in the coming year, also consider how your portfolio is positioned to respond.
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Never Panic! Focus on Key Data and Fundamentals
As your investing concerns may fluctuate throughout this year, don’t let the media and inflation concerns pressure you into making immediate financial decisions. The key is research – instead of panicking in times like these, remember to not time the market! Now is the time to focus on fundamentals, hard data, and quality that can positively impact your investments in the long term.
To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released November 2021 Stock Market Outlook1
Risk #1: Supply Chain Constraints Meet Rising Energy Prices
Strained supply chains continue causing shortages of product components and putting price pressures on raw materials and finished goods. It currently takes about 80 days to transport goods across the Pacific Ocean, which is twice as long as pre-pandemic and is creating many problems for businesses entering the holiday shopping season. To boot, once cargo ships make it to major U.S. ports, they are often stalled there for days or even weeks. The problem is significant enough that some major U.S. retailers like Walmart, Home Depot, and Costco have resorted to chartering their own cargo ships to move goods – a very costly process.2
As supply chain issues persist, rising energy prices are serving as a crosswind on businesses, applying cost pressures at seemingly just the wrong time. Crude oil prices are up over 60% this year, natural-gas prices have doubled over the last six months, and coal prices are at record.3 For businesses that rely heavily on energy, the cost of production is moving higher.
The combination of supply constraints and rising energy costs are putting the squeeze on corporate profit margins, at least in the short-term. S&P 500 company profit margins are estimated to have fallen from 13.1% in Q2 to 12.1% in Q3.4 The risk here is that rising costs continue to pressure profit margins to the point that companies end up earning less or passing along higher costs to consumers – or both.
Risk #2: Negative Earnings Revisions
Related to risk #1, the downstream effect is that corporations must respond to cost pressures, supply chain disruptions, and labor/material shortages by revising earnings forecasts lower. This can create uncertainty in the earnings outlook, particularly given the lack of visibility with respect to the duration of inflationary pressures.
According to analysts at Zacks Investment Research, the current earnings picture remains strong, even though the growth pace is expected to decelerate significantly from the first half’s breakneck pace. What we don’t know at this stage is whether the incremental change in the earnings outlook over the coming weeks, as reflected in earnings estimate revisions, will be positive or negative. This factor will be watched closely as companies start reporting earnings.
Risk #3: Disorderly Management of China’s Real Estate Bubble
The downfall of the Chinese property developer, Evergrande, caused a stir in the global markets in September. Issues with China’s real estate market have been known for some time. Evergrande racked up more than $300 billion in liabilities (2% of China’s GDP) and has some $37 billion in outstanding debt due within the next year. They have already missed $40+ million in dollar bond coupon payments due, and Chinese luxury developer Fantasia Holdings Group also missed a $206 million bond payment just recently.
For now, it appears increasingly likely that the Chinese government will not be stepping in for a full bailout, instead of allowing international investors to take losses while overseeing an unwinding of the company. This outcome seems to be favored by global markets – it shows that China is no longer willing to prop-up failing enterprises and is instead allowing a market-based outcome.5 In short, an economic ‘hard landing’ does not appear likely, but new twists and the possibility of a larger credit event are still possible, making this risk worth watching in the coming months.
Bottom Line for Investors
Perceived headwinds have been building in recent weeks, and I think it could result in higher levels of volatility in Q4 and beyond. In my view, however, these risks and perceived headwinds are likely to be fleeting – supply chain constraints should ease in coming months, moderating demand should take pressure off of energy prices, corporations should be able to navigate a few more months of price pressures, and China is not likely to allow a crisis to unravel. I believe any lost growth in the coming months will simply be pushed to 2022, not lost altogether.
So, as you keep in mind these risks to watch for the rest of the year, remember to focus on the long-term. This requires that you stick to the facts and hard data to positively impact your investments in the future. Here at Zacks Investment Management, we manage client portfolios based on investment goals, and we drive our decision-making process based on research.
To help you focus on fundamentals, I am offering all readers our Just-Released November 2021 Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure