On Monday, investors woke up to the news that the major stock indexes were dropping fast. While the decline has not been anywhere near as steep or as fast as the Covid-19 market crash in early 2020, it does mark a correction in a situation where stock prices have typically been rising every day. By midday, the Dow Jones Industrial Average was down more than 800 points, while the S&P 500 had lost more than 2.5%.
Why are prices dropping?
Stock prices are down primarily due to the news that China Evergrande Group (EGRNY, Financial)(EGRNF, Financial)(HKSE:03333, Financial), the second-largest real estate developer in China, is on the brink of collapse. A loan default on this scale could easily trigger a domino effect throughout global markets.
“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” commented Mark Williams, chief Asia economist at Capital Economics.
The company has been snapping up assets for years as China’s economy boomed, accumulating $300 billion worth of debt during the process.
However, it has been scrambling to pay off its creditors recently as property sales continue to decline. Evergrande took on levels of debt that could only be sustained if it continued generating strong cash flow growth, and that growth relied on the continuous accumulation of more debt.
The growth level necessary to avoid defaulting on its loan payments has been inhibited not only by a housing market cooldown, but also by a law introduced last year that placed a cap on debt in relation to a company’s cash flows, assets and capital levels.
Because Evergrande operates on such an immense scale, with over 1,300 real estate projects, 2,800 property services projects and investments in electric vehicles, health care services and several other sectors, defaulting on its debt could easily lead to a “cross default” among banks, investors and suppliers.
Which stocks are really being affected?
Whenever there is a market selloff, there will always be a division between companies that are actually affected by the reason for the selloff and those that are just being sold in panic.
One way to find which stocks could be in danger from the event that triggered the selloff is to consult the Aggregate chart on GuruFocus. This chart shows the day’s price changes for a selection of stocks, such as the S&P 500, the Dow or the Nasdaq. Below is the S&P 500 Aggregate chart as of midday trading on Sept. 20:
This chart shows the number of S&P 500 stocks that fall into different ranges of gains or declines for the day. For example, we can see that the vast majority of stocks have fallen less than 3%. There are still a fair number that are down between 3% and 6%. However, the ones we are most interested in here are the ones that have shown the steepest price drops. By clicking on the red bar for the 7% to 8% declines, for example, we see that two companies fall under this category: Devon Energy Corp. (DVN, Financial) and APA Corp. (APA, Financial).
Nucor Corp. (NUE, Financial) has shown an even steeper decline, down 8.51% so far, while the spot for the biggest S&P 500 decline for the day goes to Invesco Ltd. (IVZ, Financial), which is down 9.76%.
Among these four worst S&P 500 performers of the day, Invesco is a global asset manager, Nucor is a steel producer and both APA and Devon are oil and gas companies.
While it is not certain that these companies will be affected by the Evergrande crisis, and there could be other reasons for their bad stock price performance today, it is a possibility to consider. Invesco has significant exposure to Chinese assets, and oil companies could be negatively affected by any significant economic slowdown. Steel companies like Nucor, along with other global industrial giants, tend to be affected by global growth concerns as well.
Another chart that can help visualize which stocks are moving the markets is GuruFocus’ Bubble chart. This chart takes a stock index and plots the component companies based on their price change for the day and their market cap. Below is the Bubble chart for the S&P 500 as of midday trading on Sept. 20:
The unique thing about this chart is that it lets us easily spot which of the index’s biggest companies have shown the most significant price changes for the day. Companies with a larger market cap are represented by larger bubbles, so we can see that today, for example, Amazon.com Inc. (AMZN, Financial) has lost about 3.32%, while Microsoft Corp. (MSFT, Financial) is only down 1.90%.
Movements in mega-caps such as Amazon and Microsoft can often be slower than the broader markets, since many investors have the expectation that these companies will continue growing far into the future even if the rest of the market struggles.
However, if one mega-cap is seeing a bigger decline than the rest of the pack, it is likely that some investors are worried its business will be impacted. Many of the goods sold on Amazon are produced in China, so it seems reasonable to expect that an economic crisis in China would result in supply concerns.
Whenever there are big movements going on in the stock market – or even if it’s just a regular trading day – it can be helpful to see which stocks are experiencing the biggest changes. There are many ways to do this, from looking at lists of market movers to searching the news.
I have found the Aggregate and Bubble charts offered on GuruFocus to be particularly helpful in visualizing this data. In Monday’s market downturn, it was a simple matter to refer to these charts and see which stocks were suffering the most in the selloff.
Whether or not these stocks and the companies behind them will suffer the negative effects that the market fears remains to be seen. The Chinese government could step in to bail out Evergrande. The fallout might not be as bad as people are expecting, or it could turn out to be worse. As with everything else, we won’t know the future until it actually happens, but if the Evergrande situation can be resolved efficiently, then today’s market downturn could prove a rare buying opportunity in today’s overvalued market.