All Bark and No Bite

Last week, I was stuck at my house, but now that I am back at the office, normalcy has returned to my daily routine. I know some friends and family have worked remotely since the start of the pandemic, and some of them have enjoyed it. Still, my extroverted nature made my limited time away from the office pretty miserable. I found myself eager to jump on zoom calls to talk about work topics and to have some human interaction. One interesting thing that I did observe during my time was that my faithful dog, Max was at my side sleeping for the day. The only time he got up was to bark at all the vehicles dropping off packages in my neighborhood throughout the day. After sixteen months of seeing the box trucks deliver packages, I would have thought that he would accept that it is a part of life, but he can’t change his protective nature any more than I can change my need to interact with people.

For some investors, the same barking dog reaction can be observed, not when a box truck rolls through their neighborhood, but anytime something happens in the world that they believe may have a negative impact on their portfolio. This pandemic has been a case study in such behavior. Many people that wouldn’t otherwise care about what is happening in the world suddenly found themselves at home with none of their usual distractions, and the news and the stock markets were the only game left in town.

Whether its the election or the delta variant, there has been no shortage of events that have people thinking that the markets will react negatively and portfolio values will suffer. The newest event that people are talking about is Evergrande, a Chinese real estate company that has suspended interest payments on its bonds to investors. Usually, anytime a company finds itself unable to pay the interest, the end is nigh.

Of course, the financial press is covering the events surrounding the company’s collapse and speculating that this could cause another event like Lehman Brothers that could bring the financial system to its knees again.

But are these fears based in reality, or is this just another bark without much bite?

It is easy to imagine a series of events that could cause the markets some problems, and if left unchecked, could develop into something that spreads from the Chinese banking system into Europe and the rest of the developed world. But something to keep in mind that we all learned in 2008 and 2020 is that the central banks will use whatever tools they have on hand and invent new ones if needed to ensure that there is enough liquidity in the banking system to keep the financial markets functioning. In addition, the PBOC (People’s Bank of China) could employ other tools if necessary to stem the tide from any fallout from the company’s default. For example, another step could include nationalizing the company and keeping bondholders from taking massive write-downs, much like how the US government quasi-nationalized Freddie Mac and Fannie Mae back during the financial crisis.

Investors shouldn’t brush off events like this, but being informed and reacting to every headline by making changes in portfolio allocations should be avoided. Rather than barking at everything and worrying about events that could bite into our portfolios, we should remember that the amount of time we spend worrying about the events of the day are positively correlated with the impact of these events on our life which is best illustrated by famed author and napkin artist Carl Richards.

Nathan Smith is a Portfolio Manager with Rather & Kittrell.