Growth Concerns Continue to Mount

It seems every week yet another growth concern arises, yet the markets continue to hang tough helped by the Federal Reserve's largess and soothing comments. Over the last six weeks, projections for third-quarter GDP growth been halved or worse by many investment banks including Goldman Sachs. However, the major indexes have largely remained unfazed even as other areas of the markets have suffered. The cause of a significant spike of volatility Monday was Chinese property developer Evergrande, which rocked the markets to start the week on a possible default on some of its $300 billion in debt. The Dow reacted by declining nearly 1,000 points at one point in the day. However, stocks have since recovered as investors quickly moved past their fears this might be a Lehman moment for China and came to the conclusion it would not lead to global contagion. Nevertheless, the Chinese government is cracking down on the property developers in the country. This is probably a good thing long term, given the excesses in the sector. However, it is likely to significantly curtail construction spending in the coming years. Given construction activity accounts for up to 30% of the GDP of China, this will likely lead to lower growth rates both in the country and globally. Supply chain problems also refuse to go away and in some places are getting worse. The cost of PVC piping hit a record this week. Among other things, this will slightly dent homebuilder margins and could delay builds in some instances. In addition, there are a record amount of container ships stuck waiting outside the port of Los Angeles to unload. These logistical issues are starting to impact the consumer. Some items such as meat seem sparse at many grocery stores and Costco just noted that it will start limiting purchases on essential household products for what has become a perfect storm of supply chain delays for the retail sector. These items include bath tissues, roll towels, Kirkland Signature water as well as high-demand cleaning-related products. (On an anecdotal note, the two restaurants I love to get an occasional rack of lamb at in Delray Beach, Fla. no longer have the dish on the menu as they were unable to secure a consistent supply.) Meanwhile, we have the self-inflicted impact of vaccine mandates in many parts of the country such as Los Angeles and New York City. I have written on the potential for this to start to constrict economic activity, but we might have gotten a hint of these effects Thursday in the weekly unemployment claims report. California, which has been at the forefront of this movement, saw their unemployment claims shoot up by nearly 25,000 last week. This was approximately double the level of the next highest state, Virginia. In addition, a North Carolina health care system just stated it suspended almost four hundred of its employees after the firm implemented a Covid-19 vaccine mandate. Workers who continue to refuse to get vaccinated after five days will be fired -- another example of how these mandates will trim job and economic growth. Finally, Nouriel Roubini had a good piece the other day commenting on how the market seems to be pricing in a scenario where inflation will ebb in the coming quarters and economic growth will get past this recent hiccup. He believes, as do I, a more likely scenario is that we are going to have to deal with a bout of stagflation for a while. Given that is not priced into stocks at current trading levels, I remain very cautious on the overall market.

Growth Concerns Continue to Mount

Despite a largely unfazed market, here's why I remain very cautious overall.

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