US Stocks Forecast: A bad situation just got worse, but bullish prospects on horizon

US stocks were already downbeat last week with renewed risk-off tone gripped the market following China’s disappointing Retail Sales and weaker Industrial Production that raised concerns about slowing economic growth. Strong US Retail Sales also bolstered prospects of early Fed tapering, a prospect that would eventually be seen to take away the punch bowl for Wall street. 

However, the cat amongst the pigeons at the start of the week was the Evergrande story moving its way to the front pages as a critical turning point looms this week. More on this here in an article published just ahead of Asia open on Monday: Evergrande: Risk-off tone for APAC, a USD win-win scenario, bad for AUD

Wall Street collapsed on Monday as fear of contagion from a potential collapse of China's Evergrande prompted a broad sell-off and sent investors fleeing equities for safety. Evergrande executives are working to salvage its business prospects, but the default scenario is balanced between bad and worse outcomes for which investors woke up to and smelled the coffee on Monday morning. 

A messy meltdown at worst or a managed collapse are feared. The less likely prospect of a bailout by Beijing can be hoped as a best-case scenario for financial markets. In this regard, markets are keeping a watchful eye for a deadline of an $83.5 million interest payment on one of its bonds that is due on Thursday. Overall, the company has $305 billion in liabilities.

Performers on the day

As for performers, the banking sub-index dropped sharply while US Treasury prices rose as worries about the possible default of Evergrande sank the broader market. The Nasdaq fell to its lowest level in about a month, and Microsoft Corp  Alphabet Inc, Amazon.com Inc  Apple Inc, Facebook Inc and Tesla Inc were among the biggest drags on the index as well as the S&P 500.

All 11 major S&P 500 sectors were lower, with economically sensitive groups like energy down the most. The S&P 500 is down heavily from its intra-day record high hit on Sept. 2 and is on track to snap a seven-month winning streak this month. Unofficially, the Dow Jones Industrial Average lost620.22 points, or 1.79%, to 33,964.66. The S&P 500 dropped 75.28 points, or 1.70%, to 4,357.71. The Nasdaq Composite dropped 325.95 points, or 2.17%, to 14,718.02.

Bulls stand guard

Regardless of the Evergrande threat, the unknown is unlikely to derail the longest bull market in history and the bull's quest for higher highs into year-end. The odds of a formal tapering announcement by the Federal Reserve are very long in the wake of Evergrande and the underwhelming August Nonfarm Payrolls and Consumer Price Index reports.

Markets are not expecting anything of such until at least December this year, with actual tapering occurring between January and June 2022. So long as investors regard Evergrande as an isolated risk for China's local property market, the party can go on for longer.

Moreover, the US market would be regarded as a safer investment in any case which should encourage international flows into US stocks once the dust settles.