During a news cycle that included a widely anticipated Federal Reserve meeting it was perhaps a bit unusual to find a Chinese property developer dominating the headlines. But such was the case as Evergrande, one of China’s largest developers, seemingly teetered on the brink of insolvency. With about $300 billion in outstanding debt – equal to around 2% of China’s GDP – investors understandably wondered if they were seeing a pan-Pacific Lehman moment.
So far, the answer has been “no” but there are still a lot of unknowns about how this situation will play out. It’s that uncertainty that tends to hang over the market. That was reflected in the CBOE Volatility Index which jumped to as high as 28 on Monday, September 27, 2021, from a little over 20 the Friday before, ending the day around 25. The S&P 500 was down nearly 3.0% intraday before rallying to end down about 1.7%.
This was yet another reminder that sometimes events run ahead of investors, and it was hardly the only surprise to come out of China over the past few months. Chinese Premier Xi Jinping has been orchestrating a rolling crackdown on Chinese corporations, knocking more than $1 trillion in value off the markets there. (Source: Forbes.com; 7/28/21) Just last week, the government banned transactions in bitcoin, dinging that market as well. What’s next is anyone’s guess. All this is to say that sometimes market-roiling events come from out of the blue.
It's possible there was a little complacency setting in. The last stock market correction of 5% or more was nearly 12 months ago, in October of last year. (Not counting a brief intraday dip on September 20, 2021.) September 28, 2021 saw another sharp sell-off with the S&P 500 dropping -2.0% and the Nasdaq tumbling -2.8% (Source: Reuters.com; 9/28/21). For those inclined to believe a bigger decline of some sort is overdue, there are plenty of reasons to support that line of thought. Budget negotiations, the Federal deficit, tapering, rising interest rates, and generally high stock market valuations could all provide a trigger for a drop of 5% or more. Market timing, however, is not usually a productive pastime. Diversifying generally is.
Liquid alt funds are one source of diversification that over time have proven to be a useful diversifier. For example, the IQ Merger Arbitrage ETF (MNA) fell only slightly last Monday (9/27/21) amidst the market drop, consistent with its relatively low correlation to the broader market. Our flagship liquid alts fund, the IQ Hedge Multi-Strategy Tracker ETF (QAI), which can also serve to dampen volatility, also saw relatively modest declines on the day.
Markets often seem to jump from one crisis to another – the proverbial wall of worry. But the accompanying volatility can be challenging to manage. While investors can’t always anticipate how events on the other side of the world might impact markets here, they can take steps to maintain a diversified portfolio. Liquid alts can help.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Diversification cannot assure a profit or protect against loss in a declining market.
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The GDP is the total of all value added created in an economy. The value added means the value of goods and services that have been produced minus the value of the goods and services needed to produce them, the so-called intermediate consumption.
Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options.
The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.
Nasdaq is used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange The Nasdaq Composite contains all of the companies that trade on the Nasdaq. Most are technology and internet-related, but there are financial, consumer, biotech, and industrial companies as well.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.