Investors React to China Rumblings

On Monday, the S&P 500 Index1 registered its biggest percentage decline since May, falling 1.7% according to the Wall Street Journal.

What was behind the selloff? Rising worries that the world’s most indebted real estate developer, China’s Evergrande, could soon default on its debt. 

  • Goldman Sachs estimates that Evergrande’s assets are about 2% of China’s total GDP, according to Bloomberg.

While Standard & Poor’s and Fitch Ratings believe a default is probable, most Wall Street analysts don’t believe a Lehman-like failure will be the eventual outcome.

Beijing doesn’t want to appear to be bailing out a large firm. But a disorderly liquidation is not in its interests either.

One scenario being touted by analysts: a more orderly restructuring.

Bottom line

While a 10% pullback in the S&P 500 Index should never be discounted, the longer-term direction of a well-diversified portfolio is heavily influenced by Federal Reserve policy and economic growth at home.

Stocks have soared since bottoming over a year ago.

While we won’t dismiss the possibility of more volatility, overseas jitters were an excellent excuse by short-term traders to pare back on equities at the start of the week.