A combination of concerns – economic slowdown, Fed tapering of its bond buying, Delta variant, and China crackdown – have conspired to send stocks and commodities generally lower.
Will this be a garden variety pullback and re-set or could it be the start of something more severe?
Wells Fargo Investment Institute has released a State of the Markets report listing 10 current risks to the markets that could cause a correction – a drop on the major indices of more than 10 per cent.
The Russell 2000 Small Cap index is already there. Here are the 10 risks to be watching.
The S&P 500 has marked a 100% gain since its March 23, 2020, closing low of 2,237.40, closing at 4,479.71 this past Monday.
“It is often said that bull markets climb a wall of worry, and today, there are many bricks stacked in that wall,” the report reads.
Here is WFII’s top 10 list of market risks along with its assessment of whether the risk will fade, should be closely followed, or should be feared:
1. Inflation: The inflation risk continues to remain at the top of investors’ minds going into the fall season, with some experts even warning of the risk of stagflation in 2022.
The Fed continues to reassure the country that the current levels of record core inflation remain “transitory” as supply constraints and the rapid pandemic recovery have lifted prices significantly, especially in areas like housing and consumer durables.
2. Delta variant: The Delta variant of COVID-19 is a growing health concern and appears to be slowing spending in key areas such as air travel and retail.
However, the number of deaths compared to positive cases remains relatively muted.
WFII believes “the economic consequences are likely to be contained given progress on vaccinations across major economies.”
WFII believes this will fade economically, but should be followed from a health standpoint.
3. Debt ceiling: Congress is set to have a busy fall season, with the bipartisan infrastructure bill currently running on a parallel track to the budget reconciliation, which may amount, in total, to over $2 trillion in new spending.
As the country has reached its $28.5 trillion cap, Congress will also need to face the debt ceiling by mid-to-late fall.
WFII expects some “white-knuckle policy moments in September” due to the fiscal 2022 budget lacking an attached debt ceiling resolution.
WFII believes this should be followed, trending towards fear.
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