SB CAP, 4

SB Capital Insights

6/17/2024

Good Morning. We hope those of our readers who celebrated Fathers Day had an enjoyable day. The Fed announced that it will hold interest rates at its 5.25% to 5.50% target. Markets will be closed this Wednesday and investors will be listening to Fed officials’ comments to the press. 

Keep reading to see why we believe you should pay close attention to the Fed's balance sheet and what incoming retail sales could mean for the economy.

Markets 

• Once again another phenomenal week for the US equity market. Both the S&P and the Nasdaq are pushing all time highs. 

• U.S. equity landscape

  • There are currently 37 companies listed on the S&P with a market capitalization greater than $200 billion. Their combined market capitalization is $28.98 trillion.

  • There are a total of 5,696 companies listed on the major U.S. exchanges with a combined market capitalization of $69.84 trillion. This is 2.55 times greater than the 2023 GDP of the United States. 

    • This means that the 37 mega caps make up a staggering 43% of the U.S. stock market.

• This week saw strong gains from the large driving forces of the stock market, most notably from companies like Nvidia, Apple, Microsoft, Broadcom, and others. 

(Tradeview heat map S&P 500 week % change)

Stay in the know

• The Federal Reserve announced Wednesday that its committee unanimously voted to hold its interest rates at the current 5.25% to 5.50% benchmark for the seventh consecutive FOMC meeting. 

• The Fed will continue to conduct quantitative tightening (QT) by selling government-held treasuries and MBS products. It's important to note that economists do not know what effect this reduction in liquidity will have in the long run. During the Covid-19 pandemic the Fed’s balance sheet grew to a record size of $9 trillion and it began to sell these assets in June of 2022. The Fed's balance sheet has been largely ignored in favor of headlines with inflation data. We believe this is an important metric, as a reduction in liquidity could likely further raise the cost of borrowing. As the Fed conducts QT its balance sheet is still much larger than pre-pandemic, signaling that QT will continue for the significant future and its effects will grow greater.¹ 

(Size of Federal Reserve Balance Sheet in $ Trillions)

• Powell remained positive about the state of the economy, citing GDP growth and stating the economy “continued to expand at a solid pace.” He made it clear that he believes tightening policy needs to be continued. It is important to note that he stated that as of now no committee members are supportive of raising rates, which should calm rising speculation.

“We see today’s report as progress and as, you know, building confidence…But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”

• The dot plot (check out issue 3 for an explanation) showed the median estimate of the committee predicting one 25 basis point cut in 2024, a drastic decline compared to the three cuts predicted in March.

What to look out for this week

• Markets will be closed Wednesday 6/19 to observe Juneteenth. The federal holiday celebrates the end of slavery and commemorates the day in 1865 when 250,000 slaves were freed in Texas, the last state to free its slaves.

• Retail sales will come out Monday. The U.S. economy is driven by consumer spending, which makes up 70% of the nation's GDP.² Retail sales account for 6.4% of U.S. GDP as of  Q3 2023. As investors and the Fed seek to understand how restrictive rates have affected the economy, they will potentially look to the retail sales figure to see how Americans’ spending has changed. This figure is expected to rise by .3% as reported by Bloomberg.³

  

(Retail sales as a percentage of U.S. GDP)⁴

Noteworthy

• Last week Tesla shareholders re-approved Elon Musk’s $44 billion pay package. Additionally, they approved the proposal to move the company's state of incorporation from Delaware to Texas.

• Quarterback Caleb Williams is establishing his own investment firm, 888 Midas. He is partnering with advisors who have a great deal of experience in finance and particularly investment management. The group will invest in alternatives including real estate and private equity.

  • Celebrities utilizing their likeness and large checkbooks and collaborating with financial professionals is a growing trend. Celebrities are taking a more hands-on approach to their wealth than previously, and they’re establishing firms that align with their brand. Working alongside general partners, these funds can attract limited partners (investors) who seek the higher returns promised by celebrities leveraging their fanbase. Early adopters of this strategy include Serena Williams and Ashton Kutcher. This movement goes way beyond influencers persuading viewers. It already has billions of capital behind it and has the potential to completely disrupt how we consume products and entertainment.⁵

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.

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