SB Capital Insights

8/5/2024

Good morning. 

Popular and sometimes controversial investor Bill Ackman, a finance celebrity, believed his large following could help him raise an estimated $25 billion for an IPO of a closed end fund managed by his firm Pershing Square. After failing to raise an estimated $2 billion the IPO was withdrawn. This setback is a sign that times of easy money and rapid capital flowing in are over. Investors are not willing to pour money into hype and instead demand fairly priced investments with stable returns as markets remain volatile and opportunity becomes more scarce. For Ackman's potential investors, buying into the fund meant taking on the risk that their investment might trade below its net asset value. His brand and track record were not enough for investors to justify this inherent risk. 

The Fed as expected unanimously voted to hold its benchmark rate at 5.25% - 5.5%. However in a press conference Fed Chair Powell described an increased confidence that inflation is subsiding. He highlighted the Fed’s second mandate, keeping unemployment low, meaning it's obligated to promote growth in the economy. Powell announced that a rate cut “could be on the table” in September. It's important to note the Fed still remains cautious and will require more data showing inflation is declining. However, markets rallied following the press conference, with investors expecting three 25 basis point cuts that would reduce borrowing costs and promote growth. (Date of writing: July 31)

The election remains fiercely competitive, with the two candidates locked in a statistical dead heat. In other words, polls are too close to call as they are within the margin of error.

Keep reading as we explain the VIX, technology sector, and 10 year Treasury yields in the markets. We will take look at U.S. jobs report and make sense of rising fears of recession.

Markets 

• This morning the VIX has spiked to 51.96, which marks extreme volatility. As market participants hedge position through options, premiums have risen significantly. To understand the current value refer to the table below!

• The technology sector has been driving the strong declines in the U.S. equity market. Within this sector Intel sold off 31% following the disastrous earnings report. As the stock has fallen to a 9 year low, management made the decision to lay off 15% of their workforce. In addition Microsoft, Amazon, and Nvidia declines are seen on major indices based on the weight distribution.

• U.S. 10 year treasury yield falls to the lowest since last December, below 4%. Last week's job report came in weaker than expected, which is an indication of slowing economic growth. Although the Fed kept rates the same in their meeting, there were hints toward cuts following September's meeting. It is important to note that the yield curve remains inverted, which has historically been an indication of an upcoming recession. The inverted yield curve has been in place for the longest and deepest in history.       

Making sense of recession fears

(Note to readers: Trying to be as objective as possible as we strive for unbiased writing)

• This past week it was impossible not to see panic in the markets as fears of a potential recession mounted. Any good investor must remain calm and listen to the facts. We are going to try and make sense of the hysteria.

• U.S. jobs report and an explanation (Friday): A weak U.S. jobs report shook the markets. Unemployment reached 4.3%, the fourth consecutive month of unemployment rising. The economy added 35% less jobs, significantly lower than what economists had expected. A previously strong job market had led most investors to believe in a soft landing. Jobs growth promoted spending and unexpected growth in the economy. Now high interest rates, combating inflation, are widely believed to be putting a strain on business and causing a slowdown in employment. This could potentially be the cause of increased unemployment. Traditionally an increase in unemployment of this size over a few months is an indicator of recession.

  • Take a deep breath:

    • Post pandemic job gauges could be misleading and not accurately reflective of the job market. An increase in working from home, illegal migrants who file as unemployed, and temporary layoffs related to natural disasters have skyrocketed (Hurricane Beryl)

(Unemployment since rate hikes in March 2022)

• Key difference between tech declines and unemployment: The S&P 500 has experienced large declines led by a market correction in the past week. Lofty evaluations on tech and the belief that AI could generate large growth were humbled by lackluster earnings. A cascade effect began with poor quarterly reports, for example MSFT, AMZN, and Intel. Investors could be exasperated by this decline, which has caused the S&P 500 to decline 1.5% , and a rise in unemployment has stoked even greater fear, causing hysteria. Stock prices alone are not a reliable indicator of the health of an underlying economy and should not be mistaken as a recession. For example in Q2 of this year the U.S. real GDP experienced 2.8% annualized growth. A correction was seen as long overdue before the recent jobs report came out. This should mount as evidence that these two declines are significantly more independent than the market is making them out to be.

(Quarterly Change in U.S. real GDP, aka growth rate) Important to note not U.S. GDP!)

Soft Landing: The U.S. economy was widely expected to run into a recession after a recovery from Covid-19. Instead it has experienced historic growth in equities and jobs. The possibility of a soft landing at first seemed unlikely but the economy has remained strong while fighting inflation. This disappointing jobs report and slowdown should not be immediately labeled as a recession. A soft landing means the economy experiences a slowdown, and a weakening labor market could be a sign of that slowdown.

Conclusion: The exponential growth in the stock market juxtaposed with mounting evidence of a correction makes a soft landing more dramatic and painful. Markets are being forced to confront reality and reevaluate growth prospects. Growth prospects and PE ratios can't run wild in an economic slowdown. Because markets were up due to record high PE ratios, not based on earnings, prices will have to come down significantly. A recession is usually marked by a wide scale decline in the economy, but right now the economy is experiencing a slowdown, a key differentiation, combined with a dramatic market correction.

What to look out for this week

 Earnings

• (Tuesday): Uber, Walt Disney, Palantir Technologies, Caterpillar, and Airbnb (source: Investopedia)

  • With the markets experiencing large declines led by tech as well as recession fears, these earnings will be important to look out for. How consumer spending changes with popular products (like Disney's suite of entertainment services and Uber) could offer important insights. Look out for Caterpillar, which benefited from an increased surge in infrastructure spending which has since slowed. 

• (Thursday): LLY is using its large market presence to push its own weight loss drugs.

Shout out to new team members and Insta!

• Jasper Maharam, Kristian Komorowski and Griffin Mulligan  have been working diligently to deliver exciting Instagram content! It's a break from the news and is exciting and informative!

Check it out here and send it to your friends! https://www.instagram.com/sbcap_insights/

• Stay tuned for more content as we continue striving to be an exciting source of financial journalism.

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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