Four Reasons the Evergrande Debacle Will Not Sink Stocks

There’s been much debate about the impact of the Evergrande debt debacle unfolding in China.

Will it lead to contagion in other markets or will it be contained and wind up being a one-off market event fed by some end of the world media headlines, and likely an excuse for some investors to take some profit?

Thomas Lee, Head of Research at Fundstrat, has been relentlessly optimistic about stocks and relentlessly right for several years.

Here are his four reasons why the major indices can continue to move higher and side step the Evergrande fallout.

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by Matthew Fox, Business Insider

Investors should take advantage of Monday’s stock market decline caused by the Evergrande debt crisis and buy the dip, according to Fundstrat’s Tom Lee.

The S&P 500 fell as much as 3% on Monday after it became clear that Evergrande, China’s second-largest property developer, could default on certain debts. (It’s since defaulted on some loans as of this writing.)

The company has more than $300 billion in liabilities and its wide array of assets, including unfinished apartment complexes in virtually empty cities, may not cover the difference of what it owes to lenders and investors.

But Lee said in a note on Tuesday that the stock market sell-off could be reversed as soon as this week with several factors coming into play, including a key technical level, a contained dip in treasury yields, and retail sentiment extremes.

 

1. “US Treasuries didn’t get the memo.”

“On the day of the Lehman Brothers event, the 10-year yields collapsed 50 basis points. The US Treasury market bears watching because this is the ultimate safety trade.

Even gold hardly got bought [on Monday]. And the 10-year fell a mere six basis points yesterday, which as the chart shows, looks like daily volatility,” Lee said.

 

2. “Monday’s selling was amplified by retail panic.”

“Retail investors have been raising cash for six of the last seven weeks. Since the start of the pandemic, we have not seen this persistent level of liquidation.

At the extreme, retail investors getting cautious is a contrarian signal,” Lee said. The AAII sentiment also showed a large jump in negative sentiment, Lee highlighted.