This week, a cloud of ominous news settled over global markets, which saw some of the biggest losses since spring. On Monday, amid fears that Chinese real estate giant Evergrande could default to the tune of $300 billion and concerns that the U.S. could miss its looming debt-ceiling deadline, both the crypto and stock markets fell: BTC and ETH slipped about 10% and the S&P 500 fell nearly 2%. (While the stock market was mixed on Tuesday, BTC continued to fall.) Let’s take a closer look.
- For two decades, Evergrande had been China’s top real estate developer, presiding over the biggest building boom in history. The firm’s debt crisis sparked economic fears of a global “contagion” — were it to fail, it could trigger cascading global consequences. Hong Kong’s Hang Seng Index dropped 3%, inspiring some comparisons to the collapse of Lehman Brothers in 2008. (Not everyone agreed that the comparison was appropriate.)
- Nervous investors have also been looking for clues from the Federal Reserve (which began a two-day meeting on Tuesday) about when and how it will begin tapering its monthly $120 billion purchases of government bonds, which has been a major part of the COVID-era stimulus response.
- Meanwhile, Treasury Secretary Janet Yellen warned of “economic catastrophe” if the U.S. fails to raise its debt limit before next week’s deadline. In a Wall Street Journal op-ed, Yellen implored Congress to act, urging that “[defaulting] would likely precipitate a historic financial crisis.” Her plea comes as the government’s debt, as a percentage of GDP, has reached the highest level ever recorded.
Why it matters… Investors have plenty to worry about, from Congress’s game of debt-ceiling chicken to cold weather returning with COVID-19 nowhere near under control. But long-view optimists might find a glimmer of hope from the last time markets were this unsettled. From February to March 2020, as markets first reacted to the pandemic, the S&P 500 fell nearly 30% while BTC dropped 50%. Since March 2020? The S&P 500 is up nearly 90% and Bitcoin more than 600% — even accounting for this week’s declines.
