12/23/2024

Good Morning.

We wish you a happy holiday season! 

The U.S. avoided a government shutdown by signing a spending bill that will last till March. A larger bill failed to pass when President Elect Trump and Musk attacked it. Their ability to influence legislation without being in office is notable and shook up congress. Trump lacked the support from Republicans to include getting rid of the debt ceiling limit in the bill. The debt limit will kick back into effect January 2 and is currently $36 T. Trump will likely make similar efforts to remove the debt limit during his administration.

Fed Chair Powell announced a 25 basis point cut as expected by the market. The new rate will be 4.25%-4.50%. Powell remained “very optimistic” about the economy citing a predicted 2% annual GDP growth for the next few years. Markets reacted negatively to sentiment that the Fed would reduce the speed of further cuts. Many investors believed a Trump administration would mean rate cuts would continue to be cut at an accelerated pace and potentially return to the 2% pre-pandemic era.

Fed Chair Powell "From here, it's a new phase and we're going to be cautious about further cuts" 

Strong economic growth and increased confidence in the labor market has made the Fed less focused on growth. Instead, a resurgence of inflation means that price increases will likely not continue to decrease as fast and will require rates to maintain restrictive. 

FOMC participants' median anticipation for rates by the end of  2025 is 3.9%.

In today’s newsletter we will cover: 

• Market Update

  • Market Volatility 

  • Dow Jones Historic Rough Patch 

  • Bond Market 

• Fed Cuts Affect on Mortgage Rates 

• Deal of the week: Sixth Street’s WingStop acquisition

• What to look out for this week

Markets 

Market Update

• Market participants from around the world were honed in on last week's Federal Reserve rate cut decision, which shook the markets. The volatility index (VIX) that tracks the underlying S&P 500 option contracts, indicated a huge spike in market fear. The vix on Dec 18th spiked by 53% to a level of 24. 

• Equities: Stocks experienced a turbulent week, with major U.S. indexes declining roughly 2% overall. The downturn was highlighted by a sharp sell-off on Wednesday, but a recovery rally on Friday helped regain a portion of the losses, mitigating the week's earlier slump.

  • The Dow Jones Industrial Average faced a historic rough patch last week, with a 2.6% decline on Wednesday marking its tenth consecutive negative trading day—the longest losing streak since an 11-day slide in 1974. Over the course of this skid, the Dow dropped a cumulative 6.0%. However, the streak came to an end on Thursday, when the index posted a modest gain, offering a glimmer of relief amid the broader market turbulence.

• Bond Market: Bond prices declined for the second consecutive week, leading to a rise in yields. The 10-year U.S. Treasury note yield reached 4.59% on Thursday, its highest in nearly seven months, before settling at approximately 4.53% on Friday. This marks an increase from 4.15% two weeks prior and a recent low of 3.62% on September 16.

  • This upward movement in yields is influenced by the Federal Reserve's recent policy decisions. The Fed's indication of a slower pace for interest rate cuts in 2025 than previously anticipated has unsettled investors, contributing to the rise in long-term bond yields.

Fed Cuts Affect on Mortgage Rates 

The housing market is a key aspect of the inflationary pressure that is confronting the United States economy. The current housing market faces a "double whammy" of high home prices and high mortgage rates.

Average mortgage rates for a 30-year fixed loan are hovering around 7%, compared to historically low rates during the pandemic (around 3% in 2021). This sharp increase in financing costs has made homeownership significantly less affordable. High financing costs have pushed the percentage of income spent on housing for new mortgage holders to over 35%.

The Fed raised rates rapidly in 2022 to curb inflation, creating a “rate shock” in the housing market. Over half of current homeowners hold mortgages below 3.75%, creating a "lock-in effect," reducing housing inventory as homeowners are unwilling to sell and refinance at higher rates.

Mortgage rates are tied more closely to the 10-year Treasury yield and spreads, which remain elevated due to credit risk and demand for mortgage-backed securities. Investors require higher returns on Treasury bonds and mortgage-backed securities, keeping rates elevated.

The housing market remains in flux as buyers, sellers, and lenders navigate high prices and elevated mortgage rates. Fed policy, market conditions, and global economic factors will continue to shape the affordability of homeownership in the coming years.

Future Outlook: Mortgage rates are expected to remain high, with forecasts ranging from 5.5% to 7.5% through 2025. Lower rates could depend on weaker economic data, reduced inflation, or decreased government borrowing, none of which are guaranteed.

Deal of the week: Sixth Street’s WingStop acquisition

Sixth Street is a global investment firm with over $75 B in AUM. The firm is known for investing across a diverse array of platforms, inducing private credit, growth equity, and real estate. The firm is growth oriented and prioritizes innovation inorder to scale its business.

After strong competition with other investment firms like KKR and TSG Sixth Street paid an estimated $503 M for a majority stake in a UK Wingstop operator. Wingstop has locations globally and is publicly traded on the NASDAQ. However because it's a franchise large amounts of the restaurants are owned by particular operators or investors. 

Wingstop is a fried chicken chain and is the fastest growing brand in the fast food segment in the UK. Because Sixth street is private, not much information is disclosed but with over 50 sites and projected revenue of almost $190 Million this deal is being evaluated at an extremely high trading multiple for a fast food chain, breaking records in the UK. This represents the potential growth Sixth Street envisions in this investment. 

This deal comes after a similarly larger investment in a U.S. based WingStop operator called Far West in 2023. Sixth will seek to capitalize on the growth in this brand and utilize its equity in both franchise groups to further grow the business. This private equity style investment in both franchise groups is testament to how Sith Street uses a unique cross collaboration approach to scale its investments.

What To Look Out For This Week!

• Monday: Consumer Confidence (December)

• Tuesday: New Home Sales (November)

  • Stock market closes at 1:00 PM 

  • Bond market closes at 2:00 PM 

• Wednesday: Markets closed 

• Thursday: Initial jobless claims (Week Ending December 21)

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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