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Your Wealth

August 2021 Economic Commentary

The China Conundrum

We have been expecting the balloon to deflate as the market processes the drop in 10-year Treasury yields to less than 1.2% but may have to wait until the more volatile month of September. Under normal circumstances the drop in rates would be telegraphing a significant slowdown in the economy but as we have pointed out, these are not “normal times”. It is difficult to rely on traditional metrics with such widespread fiscal and monetary support still in place.

The as-good-as-it-gets market environment is showing some strain but the supportive macro and company-specific tailwinds have not abated. While we believe a 5-10% correction seems likely as we lap the rapid growth metrics of twelve months ago, with robust Fed support still in place and Q2 earnings looking strong, it’s hard to make the case that the bull market is over. High valuations have put us in a vulnerable position where we need ongoing fiscal and monetary support to extend the sugar high. Some Fed governors recently tilting toward a more hawkish stance of raising rates sooner than later have planted seeds of doubt, but the repeated mini-corrections in equity markets so far this year have proven short lived.

Compounding economic slowdown fears are concerns that increasing COVID Delta variant cases will result in new global shutdowns. The bullish trade all year has been playing the significant earnings and revenue increases as consumer-driven businesses open up. Our opinion is that there is very little public appetite for renewed shutdowns but it’s impossible to predict the aggressiveness of the new variant and the extent to which governments will respond to it. The market seems unconcerned, probably predicting correctly that vaccine penetration will blunt the effect enough to avoid any fallout in consumer spending due to government overreach.

Another risk factor playing out is the continued crackdown on businesses in China by the CCP. The central government spent decades building a quasi-capitalist system only to reverse course in the last nine months. We could be witnessing a significant shift in Chinese behavior away from globalism. Premier Xi may have finally decided that his vision of Chinese Marxism needs to be moved front and center. The underlying strategy is to ramp up control of citizens at the expense of the free markets. How this shakes up global growth remains to be seen. China accounted for close to 30% of worldwide growth between 2014 and 2019, so the impact could be significant. Many listed Chinese stocks have been obliterated by each new government announcement restricting their ability to conduct business. Kyle Bass of Hayman Capital recently pronounced that it was now “unconscionable for fund managers to invest in China”. Our view is less extreme but we have chosen to keep our China exposure very low and currently have no appetite for buying the dip.

This environment only causes us to reiterate that balance, diversification, and staying the course are as important as ever. We could see a choppy environment as the rest of the year plays out, with growth that isn’t as strong, the expectation of waning policy support, the outcome of Delta and potentially new COVID variants, and continued volatility in China. We have already witnessed tremendous market gains, so a pause should be expected. With inflation remaining a big concern, we are hoping that the transitory case that the Fed has laid out proves to be correct.

Please call or email me with any questions or observations at or 843-412-1420.

Atlantic Union Bank Wealth Management is a division of Atlantic Union Bank that offers asset management, private banking, and trust and estate services. Securities are not insured by the FDIC or any other government agency, are not deposits or obligations of Atlantic Union Bank, are not guaranteed by Atlantic Union Bank or any of its affiliates, and are subject to risks, including the possible loss of principal. Deposit products are provided by Atlantic Union Bank, Member FDIC.

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