SB Capital Insights

7/1/2024

Good morning. The Feds’ preferred inflation gauge, core PCE, rose .08% MoM which is the lowest increase since 2020. Americans will spend an estimated $9.4 billion this Fourth of July with the average barbecue costing $100. Keep reading to learn more about market volatility frequencies and record high cash holdings. We hope you have a great Fourth of July.

Markets 

• The gains made in the stock market were primarily wiped away on Friday as a result of inflation and geopolitical worries. This illustrates a continuation of mixed sentiments from market participants. 

• Every day we see the S&P 500 move a certain percentage. What does this mean in terms of market volatility and historic movement? The chart below represents the number of daily percent moves over the last 10 years. As you can see, the majority of days had between 0% and 1% change, followed by -1% to 0%. The rest have a far smaller probability of occurring and have great implications in terms of increased market volatility. 

SB Capital Proprietary Research

Record Levels of Cash and Equivalent Holdings

Stockpiles of cash and equivalents are at record levels among corporations and private equity. Since the pandemic cash holdings have risen. Fear about a potential recession made investors hesitant to deploy capital. 11 interest rate increases by the Fed since Covid-19 made cash, which is a near risk-free asset, significantly more lucrative than before. In addition, expected rate cuts are increasing inflows into cash equivalents in order to lock in the current rates. According to Clearwater these holdings are earning a 5.48% annualized return.

- Corporate cash holdings are at $4.11 trillion.

Private equity’s cash holdings have reached $4 trillion. With this amount of cash the industry in total has enough to buy any company in the world and have some left over. Cash holdings in private equity are known as dry powder. Below is a breakdown of dry powder levels within private equity.

We at SB Capital believe these holdings are a key economic indicator. Hesitancy by private equity to invest in new companies, as well as hesitancy by existing companies to reinvest in their own company, should not be ignored. This might mean that corporations believe they can make a higher return in cash rather than reinvesting. In private equity it signals that they have not found opportunities they deem worth investing in. The level of these holdings could potentially be used as an indicator similar to PMI. It could be used by investors to estimate the change in growth and understand investor sentiment.

Deal Flow

Volkswagen will invest up to $5 billion into a partnership with Rivian. The EV company is hemorrhaging cash as it struggles to ramp up production. At an average sale price of $80,000, it loses $30,000 per vehicle sold. This amounts to $1.4 billion in losses in Q1 2024. 

VW is struggling to roll out its own EV battery technology. Having failed to develop its battery hardware and software, it is looking to partner with Rivian to develop future technology together. In return for VW gaining access to critical technology, Rivian is receiving a vital lifeline. With it will reinvest in production and efficiency to reach profitability. The investment will initially be a $1 billion note that converts into RIVIN shares in order to give VW equity. 

What to look out for this week

• July 4, Independence Day, markets will be closed.

• Job reports will come out on Friday. Nonfarm payrolls and the unemployment rate will provide key data to understand the state of the U.S. job market. Part of the Fed's dual mandate is to keep unemployment low, and if there is an unexpected increase it will strengthen the case to lower interest rates faster.

• This Tuesday Fed Chair Powell will deliver remarks on monetary policy.

Noteworthy

• Biden's debate performance was widely considered disastrous by both sides of the political spectrum. In the aftermath, there has been a series of objections and concerns coming from his own party regarding the future of his reelection bid.

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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