“‘Icahn’s favorite Wall Street saying: “If you want a friend, get a dog.” Over his storied career, Icahn has made many enemies. I don’t know that he has any real friends. He could use one here.’”
— Bill Ackman, Pershing Square Capital Management
That was billionaire hedge-fund manager Bill Ackman, founder and chief executive of Pershing Square Capital Management, resurrecting his longstanding feud with billionaire activist investor Carl Icahn in a tweet Wednesday.
Ackman was referencing the fallout from the recent report by short-selling firm Hindenburg Research that accused Icahn’s publicly traded investment vehicle, Icahn Enterprise Partners LP IEP, -13.83%,
of inflating asset values and causing his company to trade at a large premium. The report from May 2 has cost IEP about $10.9 billion in lost market cap, after the stock tumbled another 21% on Thursday.
Ackman said he is neither long or short IEP but merely “watching from a distance.”
But he seemed to agree with Hindenburg’s founder and CEO, Nate Anderson, who questioned margin loans extended to Icahn using his roughly 85% stake in IEP as collateral. Icahn has not disclosed the terms of those loans although he recently told the Financial Times that he used the money to make additional investments outside of his publicly traded vehicle.
“Over the years I have made a great deal of money with money,” he was quoted as having said. “I like to have a war chest, and doing that gave me more of a war chest.”
Ackman said the margin lender or lenders “must be extremely concerned with the situation,” particularly after IEP has disclosed a federal investigation of its business and corporate governance.
For his part, Icahn has called Hindenburg’s analysis “misleading and self-serving” and said it was designed solely to hurt long-term IEP shareholders.
Ackman compared the situation to that of failed investment fund Archegos, “where the swap counterparties were comforted by each having relatively smaller exposures to the situation.”
“The problem is that multiple lenders make for a more chaotic situation. All it takes is for one lender to break ranks and liquidate shares or attempt to hedge, before the house comes falling down. Here, the patsy is the last lender to liquidate.”
Ackman also expressed his surprise that Icahn has not disclosed the margin-loan terms, or even said who provided them. “My understanding of 13D SEC rules is that they require disclosure of sources of financing and even copies of financing agreements, although many investors ignore these requirements.”
Ackman also questioned how IEP’s large dividend yield is feasible, as it’s not supported by operating cash flows.
“The yield is generated by returning capital to outside shareholders, which is in turn funded by the company selling stock to investors,” said Ackman.
Icahn’s problem now is that his system has been outed by the short seller, Ackman wrote.
“Transparency is not the friend of $IEP having caused a more than 50% decline in the shares, which has caused Icahn to post more shares, now more than 65% of his holdings,” he said in the tweet.
The bad blood between Icahn and Ackman goes back to a business dispute the two had over a 2003 deal involving Hallwood Realty. The litigation between them went on for years.
But their animosity for one another hit a crescendo in 2013, when Bill Ackman publicly waged a $1 billion short-selling campaign against Herbalife. Sensing weakness, Icahn took a long position in Herbalife’s stock HLF, -5.21%
and helped deal Ackman significant losses on his bet over time.
The two claimed they had made up in 2014, sharing a stage at a conference broadcast by CNBC.
Ackman had previously had taken a soft shot at Icahn over the Hindenburg report, saying there was a “karmic quality” to it. But now their battle of Wall Street titans appears to be back in full force.
U.S. stock futures rose on Thursday as bulls continued to be emboldened by hopes the Fed is now done raising interest rates.
How are stock-index futures trading
On Wednesday, the Dow Jones Industrial Average DJIA fell 57 points, or 0.17%, to 33562, the S&P 500 SPX declined 19 points, or 0.46%, to 4119, and the Nasdaq Composite COMP dropped 77 points, or 0.63%, to 12180.
The stock market, as measured by the S&P 500 Index SPX, has struggled to maintain the rally that began in mid-March, and now we are getting new sell signals from some of our internal indicators.
SPX was turned back by resistance near 4200 for the third time since last August. That is an extremely strong resistance area now. Moreover, there is further resistance at 4300. On the downside for SPX, there is technically support at 3970, where the small gaps exist on the SPX chart. A close below 3950 would be extremely bearish and…
European stocks finished higher Friday, with the Stoxx Europe 600 index STOXX Europe 600 Index rising 0.34% to 469.00.
The German DAX DAX increased 0.54% to 15,881.66, the French CAC 40 index CAC 40 Index increased 0.51% to 7,577.00 and the FTSE 100 index FTSE 100 Index increased 0.15% to 7,914.13.
U.S. stocks closed lower Friday as investors digested strong big bank earnings, weak retail sales, and hawkish comments from a Federal Reserve official, but all three major benchmarks booked weekly gains.
How did stocks trade?
The Dow Jones Industrial Average DJIA, -0.42%
shed 143.22 points, or 0.4%, to close at 33,886.47.
The S&P 500 SPX, -0.21%
fell 8.58 points, or 0.2%, to finish at 4,137.64.
Nasdaq Composite COMP, -0.35%
declined 42.81 points, or 0.4%, to end at 12,123.47.
For the week, Dow rose 1.2%, the S&P 500 gained 0.8% and the technology-heavy Nasdaq Composite edged up 0.3%. The Dow booked a fourth straight week of gains in its longest win streak since October, according to Dow Jones Market Data.
“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday during a speech in San Antonio, Texas.
Waller’s comments were “pretty hawkish,” said Jackie Rogowicz, an investment analyst at Penn Mutual Asset Management, in a phone interview. She said she’s expecting the Fed to raise its benchmark interest rate by a quarter percentage point in May, and at least at this stage, sees some potential for another rate hike in June.
Inflation data released earlier in the week showed a larger-than-expected slowdown in wholesale prices, while so-called core consumer-price inflation remained stubbornly high as it ticked higher to a rate of 5.6% year-over-year.
Marvin Loh, senior global strategist at State Street, said Waller’s comments were a departure from the more dovish tone evinced by other senior Fed officials since the Fed’s March policy meeting.
“This is one of the more hawkish comments over the past week. A lot of the Fed speak has leaned toward ‘one and done’ in terms of rate hikes,” Loh said during a phone call with MarketWatch.
Meanwhile, fresh economic data on Friday showed sales at retailers, a critical component of consumer spending, dropped 1% in March, declining for the fourth time in the past five months. The decline was sharper than the contraction that economists polled by the Wall Street Journal had anticipated.
A popular consumer-sentiment survey released Friday showed respondents’ outlook has risen slightly to 63.5 in April, rebounding from a four-month low, but also reflected slightly higher anxiety about inflation.
While consumer spending hasn’t fallen off a cliff, it has continued to weaken from the elevated levels seen in the aftermath of the COVID-19 pandemic, economists said.
“The cumulative effect of historically high inflation, rising interest rates, and reduced access to credit is already taking a toll on consumers’ ability and willingness to spend,” said Lydia Boussour, senior economist at EY Parthenon, in emailed commentary. “And the full effect of recent banking-sector turmoil and the associated tightening in credit conditions has yet to be felt.”
The first bank earnings reports since regional banks including Silicon Valley Bank failed last month offered some optimism though. Shares of JPMorgan Chase & Co. JPM, +7.55%,
the U.S.’s biggest bank, jumped after it reported earnings and revenue well above forecasts.
JPMorgan CEO Jamie Dimon said the U.S. economy looked “generally healthy,” but warned the coast was not completely clear. “The storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks,” he said.
The “big banks are well-capitalized,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial in a phone interview. “They benefited from some deposit inflows in March.”
Investors have been anxious to see how the banks would perform as analysts have been cutting earnings estimates for both large and regional banks in the wake of the crisis.
“So far it seems the numbers are coming in pretty good,” said State Street’s Loh. However, “we have to wait for more smaller lenders to start reporting” to get a better picture of how banks are doing in the wake of last month’s turmoil.
Companies in focus
Shares of Boeing Co. BA, -5.56%
dropped 5.6% after the jet maker warned late Thursday that a manufacturing hang-up could cause problems for production and delivery of “a significant number” of 737 Max planes.
U.S.-listed shares of Curaleaf Holdings Inc. CURLF, -6.69%
Shares of General Electric Co. GE, +1.21%
rose 1.2% after bullish UBS analyst Chris Snyder raised his price target by 15%. The company’s shares have surged this year thanks to a planned spin off.
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U.S. stock-index futures turned higher in a holiday-shortened session after a solid March jobs report, though investors won’t fully digest the data until next week with cash trading in equities closed due to the Good Friday holiday.
Trading in stock-index futures closed at 9:15 a.m. Eastern. Stock-index futures resume trading at their regular time, 6 p.m., on Sunday, as U.S. markets return to normal trading hours Monday.
The U.S. stock market is closed Friday, April 7, for the Good Friday holiday, but the bond market will be briefly open.
Friday morning has seen the release of the monthly jobs report for March, a key piece of economic data that households, investors and industry leaders will be following for clues to how much further progress the Federal Reserve has been making in its inflation fight.
U.S. stock-index futures turned higher in a holiday-shortened session after a solid March jobs report, though investors won’t fully digest the data until next week with cash trading in equities closed due to the Good Friday holiday.
Trading in stock-index futures closed at 9:15 a.m. Eastern. Stock-index futures resume trading at their regular time, 6 p.m., on Sunday, as U.S. markets return to normal trading hours Monday.
What stock-index futures are doing
Futures on the Dow Jones Industrial Average YM00, +0.19%
rose 64 points, or 0.2%, to 33,723.
S&P 500 futures ES00, +0.24%
gained 9.75 points, or 0.2%, to 4,141.75.
Nasdaq-100 futures NQ00, +0.10%
ticked up 13.50 points, or 0.1%, to 13,184.25.
With the exception of the Dow industrials, U.S. stocks finished the holiday-shortened week lower on Thursday after three consecutive weekly gains for the S&P 500 and the tech-heavy Nasdaq. The Dow DJIA, +0.01%
rose 0.6% for the week, while the S&P 500 SPX, +0.36%
shed 0.1% and the Nasdaq COMP, +0.76%
slumped 1.1%, after scoring its best quarter since 2020.
Market drivers
The U.S. added 236,000 new jobs in March, defying the Federal Reserve’s hopes for a big slowdown in hiring and possibly making it harder for the central bank to tame inflation. Economists polled by The Wall Street Journal had forecast 238,000 new jobs.
The unemployment rate, meanwhile, slipped to 3.5% from 3.6%. Wages rose 0.3% last month.
“This month’s report indicates that interest rate hikes have yet to impact tight unemployment conditions,” said Steve Rick, chief economist at CUNA Mutual Group, in emailed comments.
Treasury yields popped higher and the dollar rose, though traders noted conditions were thin due to the holiday. Fed-funds futures showed traders pricing in a nearly 70% chance the Federal Reserve will lift interest rates by a quarter-point in May and a roughly 30% chance policy makers will leave rates unchanged. Traders had seen a roughly 50-50 split on Thursday.
“Today’s jobs report is consistent with a slow-moving recession unfolding in the U.S. and one that does not point to immediate resolution of inflation concerns,” said Jason Pride, chief investment officer of private wealth at Glenmede, in a note. “As such, the odds of another quarter-point rate hike in May should go higher as the data does not appear to justify a Fed pause.”
That said, policy makers and investors will see a raft of data before the next Fed meeting, including next week’s consumer-price index reading, Pride noted.
Good Friday is a market holiday but not a U.S. federal holiday. That means the U.S. Labor Department released its March jobs report, as usual. Bond traders will see a half day of trading, with Sifma recommending a noon ET close to allow a reaction to the data.
Investors saw a stream of jobs-related data over the course of the past week. Data on Tuesday showed the number of U.S. job openings dropped below 10 million to a 21-month low, indicating a hot jobs market may be starting to lose some sizzle.
ADP on Wednesday said the private sector added 145,000 jobs in March, well below the 210,000 expected by economists. Weekly jobless claims data on Thursday morning showed first-time applications for benefits last week came in higher than expected.
Data on the U.S. consumer and housing market, plus several notable earnings reports, will be this week’s highlights. Barring any surprises, federal financial regulators’ Congressional testimony will be the main event on the banking front.
On Wednesday, Fed Vice Chair for Supervision Michael Barr and Federal Deposit Insurance Corp. Chairman Martin Gruenberg are scheduled to testify before the House Financial Services Committee. They’ll discuss the collapses of Silicon Valley Bank and Signature Bank and efforts to maintain confidence in the U.S. banking system.
U.S. stocks finished Friday higher, despite a jump in the cost of Deutsche Bank’s credit-default swaps helping to reignite banking-sector worries. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each booked weekly gains.
How stocks traded
The Dow Jones Industrial Average DJIA, +0.41%
rose 132.28 points, or 0.4%, to close at 32,237.53.
The S&P 500 SPX, +0.56%
gained 22.27 points, or 0.6%, to finish at 3,970.99.
The Nasdaq Composite COMP, +0.31%
added 36.56 points, or 0.3%, to end at 11,823.96.
For the week, the Dow gained 1.2%, while the S&P 500 rose 1.4% and the Nasdaq advanced 1.7%, according to FactSet data. The Dow snapped two straight weeks of losses, while the S&P 500 and Nasdaq each booked back-to-back weekly gains.
What drove markets
U.S. stocks ended modestly higher Friday to notch weekly gains even as worries over the banking system lingered.
Bank concerns have cast a “heavy cloud over the market,” with investors worried about “weak links,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview Friday. Ma said he expects investors will be looking to sell, potentially into any rallies, “until some of these clouds are lifted.”
DB, -3.11% dropped Friday, after the cost of insuring the bank against a credit default jumped. The bank’s credit-default swaps had risen to the highest level since late 2018, according to a Reuters report Friday.
Treasury Secretary Janet Yellen announced Friday she called an unscheduled meeting of the Financial Stability Oversight Council or FSOC which was created in the wake of the 2008 financial crisis to help the government combat threats to financial stability. The FSOC issued a short statement after the market closed Friday saying that “while some institutions have come under stress, the U.S. banking system remains sound and resilient”.
“Clearly, somebody thinks there are some concerns there,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. The problems facing European banks stem back to the era of negative interest rates, which set banks up for large losses on their bond holdings, he said.
The selloff in Deutsche Bank shares weighed on banks in the U.S. and Europe, as banking-sector fears reemerged. Shares of UBS Group UBS, -0.94%,
which recently agreed to buy rival Credit Suisse Group, fell Friday.
Other major European lenders, includingItaly’s UniCredit S.p.A UCG, -4.06%
and Spain’s Banco Santander SA SAN, -3.00%,
also saw their shares sink.
“The thing that’s important to know about financials is there probably are banks that have problems, but there are others that don’t,” Frederick told MarketWatch during a phone interview. “People need to do some research.”
The S&P 500’s financial sector fell 0.1% Friday, according to FactSet data.
While banking-sector woes have hammered the financial sector this month, the outperformance of megacap technology stocks and other sectors have helped prop up the broader U.S. equities market. So far this month, the S&P 500 index is up less than 0.1%, FactSet data show.
Concerns about the fragility of the banking sector have been percolating following a year of the Federal Reserve’s aggressive interest rate hikes. On Wednesday, the Fed announced that it hiked its policy rate by a quarter point to a range of 4.75% to 5% while projecting it could deliver one more 25 basis-point hike in 2023.
Yields on the 2-year Treasury note TMUBMUSD02Y, 3.779%
and 10-year Treasury note TMUBMUSD10Y, 3.376%
each fell Friday in their third straight week of declines, according to Dow Jones Market Data. Two-year yields slid to 3.777% on Friday, the lowest level since September based on 3 p.m. Eastern time levels, while 10-year Treasury yields dropped to 3.379%, their lowest rate since January.
The role of regional banks in the U.S. economy is “huge,” said Sandi Bragar, chief client officer at wealth management firm Aspiriant, in a phone interview Friday. Bragar said she worries that recent regional bank failures will result in a pullback in lending that leads to slower economic growth and potentially a recession.
“Our stance has been to be very diversified and we have been remaining on the defensive side of things,” she said.
Within equities, that has meant holding “high-quality companies” that should be resilient in “poor economic times,” including stocks in areas such as healthcare, information technology and consumer staples, said Bragar.
U.S. stocks ended lower Friday as worries about banking-sector stability reemerged following a bankruptcy filing by SVB Financial Group and the release of data showing banks borrowed $165 billion from the Federal Reserve over the past week.
How stocks traded
The Dow Jones Industrial Average DJIA, -1.19%
fell 384.57 points, or 1.2%, to close at 31,861.98.
The S&P 500 SPX, -1.10%
dropped 43.64 points, or 1.1%, to finish at 3,916.64.
The Nasdaq Composite COMP, -0.74%
slid 86.76 points, or 0.7%, to end at 11,630.51, snapping a four-day win streak.
For the week, the Dow fell 0.1%, the S&P 500 gained 1.4% and the Nasdaq climbed 4.4%, according to Dow Jones Market Data. The Dow booked back-to-back weekly losses while the Nasdaq saw its biggest weekly percentage gain since January.
What drove markets
U.S. stocks fell Friday as worries about the banking sector persisted.
“The markets are up and down all this week, and they’re moving typically in big amounts, because there really isn’t any consensus on how the strains in the banking system will play” into the economy, said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, in a phone interview Friday. Investors are trying to get a sense for how quickly the economy may be slowing and whether the problems in the banking sector will lead to an “accelerated slowing,” he said.
Concerns about the banking sector’s ability to withstand deposit flight reemerged Friday morning after SVB Financial Group SIVB, -60.41% announced it had filed for Chapter 11 bankruptcy protection. SVB is the holding company of Silicon Valley Bank , which was put into FDIC receivership last Friday.
On Thursday, First Republic Bank announced that it would receive $30 billion of uninsured deposits from a group of large U.S. banks. JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. were among the 11 banks that agreed to provide the deposits.
Meanwhile, Federal Reserve data released Thursday afternoon in New York showed banks borrowed a combined $165 billion from the central bank. Most of the borrowing occurred via the Fed’s discount window. But a small amount was also tapped through the Fed’s new Bank Term Funding Program that allows bonds trading at a discount to be used as collateral, at par value. The fact that borrowing through the discount window has soared to a record high was adding to the market’s concerns about the banking sector, analysts said.
First Republic Bank FRC, -32.80%
shares plunged 32.8% Friday, while Credit Suisse Group CS, -6.94%,
which earlier this week got a lifeline from the Swiss National Bank, closed 6.9% lower, according to FactSet data.
At least four major banks have put restrictions on trades that involve troubled Swiss lender Credit Suisse Group or its securities, Reuters reported Friday, citing people with direct knowledge of the matter.
“I think there are still a lot of questions right now,” said Mark Luschini, chief investment strategist at Janney, during a phone interview with MarketWatch. “Investors can’t seem to hold their enthusiasm for equities for longer than a 24-hour news cycle.”
It’s not hard to understand why investors are still so anxious about the banking sector given the surge in borrowing from the Fed, said Matt Maley, chief market strategist at Miller Tabak + Co.
“Given that banks borrowed over $150bn at the Fed’s discount window on Wednesday, which compares to $4.4bn the week before, one can understand why investors are worried that the situation might be a bit more dire than the authorities are admitting to right now,” Maley said in emailed commentary.
In economic news, the Conference Board said Friday that the U.S. leading economic index fell 0.3% in February, marking the 11th straight monthly decline. U.S. industrial production was flat in February, data released Friday by the Fed show.
Meanwhile, the University of Michigan’s latest reading on consumer sentiment showed consumers were more downbeat in March than at ay time in the last four months.
While stocks fell Friday, they finished the week mostly higher. The Dow Jones Industrial Average slipped 0.1% for the week, while the S&P 500 booked a 1.4% weekly gain and the technology-heavy Nasdaq Composite saw a weekly rise of 4.4%, according to Dow Jones Market Data.
Shares of PacWest Bancorp PACW, -18.95%
and Western Alliance Bancorp WAL, -15.14%
tumbled as regional banks continued to face pressure, with PacWest falling almost 19% and Western Alliance dropping 15.1%.
Shares of Microsoft Corp. MSFT, +1.17%
rose 1.2% as analysts saw the latest iteration of Chat GPT giving the tech giant an even greater edge. In other megacap tech names, Alphabet Inc.’s Class A GOOGL, +1.30%
shares gained 1.3% while semiconductor giant Nvidia Corp. NVDA, +0.72%
advanced 0.7%.
U.S. bank stocks ended regular trading with solid gains on Thursday, as banks announced a $30 billion deposit capital infusion for First Republic Bank and as Treasury Secretary Janet Yellen cited the strength of the financial system.
The 11 banks confirmed a report from the Wall Street Journal and others about providing financial support for First Republic Bank FRC.
U.S. stocks ended sharply lower Friday as investors parsed mixed signals from the February jobs report amid ongoing concerns about contagion in the banking sector from the troubles at Silicon Valley Bank.
How stocks traded
The Dow Jones Industrial Average DJIA, -1.07%
dropped 345.22 points, or 1.1%, to close at 31,909.64, its fourth straight day of declines for its longest losing streak since December.
The S&P 500 SPX, -1.45%
fell 56.73 points, or 1.4%, to finish at 3,861.59.
Nasdaq Composite COMP, -1.76%
sank 199.47 points, or 1.8%, to end at 11,138.89.
For the week, the Dow sank 4.4%, S&P 500 dropped 4.5% and the Nasdaq shed 4.7%, according to Dow Jones Market Data. The Dow booked its worst week since June, the S&P 500 saw its biggest weekly percentage decline since September, and the Nasdaq had its biggest percentage slide since November.
What drove markets
U.S. stocks slumped amid investor concerns about the banking sector after the closure of Silicon Valley Bank by the Federal Deposit Insurance Corp and in the wake of the monthly employment report released Friday.
In a sign of investor anxiety, the CBOE Volatility Index VIX, +9.69%
was up Friday afternoon at almost 25, after jumping Thursday, according to FactSet data, last check.
“Bears came out of hibernation this week after waking up to a warning shot from the banking space,” said Adam Turnquist, chief technical strategist for LPL Financial, in emailed comments Friday, pointing to the collapse of Silicon Valley Bank.
Silicon Valley Bank was closed Friday by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corp. was appointed receiver, with the bank becoming the first FDIC-backed institution to fail this year.
The SPDR S&P Regional Banking ETF KRE, -4.39%
was down more than 4% Friday afternoon, FactSet data show, while shares of Bank of America Corp. BAC, -0.88%
closed 0.9% lower, Citigroup Inc. C, -0.53%
slid 0.5% and JPMorgan Chase & Co. JPM, +2.54%
rose 2.5%.
Worries over the banking sector are “probably overshadowing” the positive aspects of the employment report, said Karim El Nokali, investment strategist at Schroders, in a phone interview Friday.
The U.S. employment report for February showed the labor market continued to grow at a robust pace last month, with the U.S. economy adding 311,000 jobs, more than the 225,000 that economists polled by the Wall Street Journal had expected.
But “if you dig a little deeper” into the report, average hourly earnings came in “a little lighter than expected” while labor-force participation ticked up, which are positive developments from an inflation standpoint, said El Nokali.
Average hourly wages grew by 0.2%, a slower rate than the 0.3% rate economists had expected. It was also less than the 0.3% increase in January. The unemployment rate ticked higher to 3.6%, helped by an increase in the labor-force participation rate.
“On the margin,” said El Nokali, the employment report was “positive for the equity market.” He said it would “probably argue more” for the Federal Reserve to raise its benchmark rate by 25 basis points at its policy meeting later this month, as opposed to a 50-basis-point hike that investors had been fearing leading up to the employment data.
Fed Chair Jerome Powell said earlier this week that the “totality” of jobs and inflation data would determine whether the central bank would go back to raising its policy interest rate by another 50 basis points at its meeting later in March.
After climbing earlier in the week, odds of a 50-basis-point rate hike by the Fed have moderated over the past 24 hours. Traders now see a 62% chance of the central bank raising its benchmark rate by 25 basis points, according to the CME FedWatch Tool.
Meanwhile, Treasury yields sank Friday.
The yield on the 2-year Treasury note TMUBMUSD02Y, 4.594%
dropped 31.4 basis points to 4.586%, while the 10-year Treasury yields fell 22.8 basis points to 3.694%, according to Dow Jones Market Data. The Treasury yield curve remains massively inverted, which has contributed to banks’ woes.
Companies in focus
SVB Financial Group, the parent of Silicon Valley Bank, saw its shares halted for volatility after falling 60% on Thursday. The bank was taken over by the FDIC helping to a broader selloff in regional and international U.S. banks that has weighed on the broader market.
Barnes & Noble Education Inc. BNED, +6.98%
climbed 7% after the company trimmed its third-quarter loss to 48 cents per share from a loss of 71 cents a year ago.
Oracle Corp. ORCL, -3.22%
shares dropped 3.2% after the software company’s fiscal third-quarter revenue fell short of Wall Street expectations. Adjusted earnings were $1.22 per share, compared to $1.13 in the year-ago period.
Gap Inc. GPS, -6.13%
shares slid 6.1% after the clothing retailer predicted first-quarter sales could fall “in the mid-single-digit range” compared to the same quarter last year. The company said it would lay off executives and thin management layers as part of a bid to cut $300 million in costs.
Silicon Valley could use a reboot. The biggest players aren’t growing, and more than a few are seeing sharp revenue declines. Regulators seem opposed to every proposed merger, while legislators push for new rules to crack down on the internet giants. The Justice Department just can’t stop filing antitrust suits against Google. The initial public offering market is closed. Venture-capital investments are plunging, along with valuations of prepublic companies. Maybe they should try turning the whole thing on and off.
The only strategy that seems to be working is to lay people off. Tech CEOs suddenly are channeling Marie Kondo, tidying up and keeping only the people and projects that “spark joy,” or at least support decent operating margins. Layoffs.fyi reports that tech companies have laid off more than 122,000 people already this year.
David Rosenberg, the former chief North American economist at Merrill Lynch, has been saying for almost a year that the Fed means business and investors should take the U.S. central bank’s effort to fight inflation both seriously and literally.
Rosenberg, now president of Toronto-based Rosenberg Research & Associates Inc., expects investors will face more pain in financial markets in the months to come.
“The recession’s just starting,” Rosenberg said in an interview with MarketWatch. “The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” Investors can expect to endure more uncertainty leading up to the time — and it will come — when the Fed first pauses its current run of interest rate hikes and then begins to cut.
Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 SPX, -0.61%
could drop 30% from its current level before that happens. Said Rosenberg: “You’re left with the S&P 500 bottoming out somewhere close to 2,900.”
At that point, Rosenberg added, stocks will look attractive again. But that’s a story for 2024.
In this recent interview, which has been edited for length and clarity, Rosenberg offered a playbook for investors to follow this year and to prepare for a more bullish 2024. Meanwhile, he said, as they wait for the much-anticipated Fed pivot, investors should make their own pivot to defensive sectors of the financial markets — including bonds, gold and dividend-paying stocks.
MarketWatch: So many people out there are expecting a recession. But stocks have performed well to start the year. Are investors and Wall Street out of touch?
Rosenberg: Investor sentiment is out of line; the household sector is still enormously overweight equities. There is a disconnect between how investors feel about the outlook and how they’re actually positioned. They feel bearish but they’re still positioned bullishly, and that is a classic case of cognitive dissonance. We also have a situation where there is a lot of talk about recession and about how this is the most widely expected recession of all time, and yet the analyst community is still expecting corporate earnings growth to be positive in 2023.
In a plain-vanilla recession, earnings go down 20%. We’ve never had a recession where earnings were up at all. The consensus is that we are going to see corporate earnings expand in 2023. So there’s another glaring anomaly. We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates – at least not yet.
There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom. 2022 was the year where the Fed tightened policy aggressively and that showed up in the marketplace in a compression in the price-earnings multiple from roughly 22 to around 17. The story in 2022 was about what the rate hikes did to the market multiple; 2023 will be about what those rate hikes do to corporate earnings.
“ You’re left with the S&P 500 bottoming out somewhere close to 2,900. ”
When you’re attempting to be reasonable and come up with a sensible multiple for this market, given where the risk-free interest rate is now, and we can generously assume a roughly 15 price-earnings multiple. Then you slap that on a recession earning environment, and you’re left with the S&P 500 bottoming out somewhere close to 2900.
This is just pure mathematics. All the stock market is at any point is earnings multiplied by the multiple you want to apply to that earnings stream. That multiple is sensitive to interest rates. All we’ve seen is Act I — multiple compression. We haven’t yet seen the market multiple dip below the long-run mean, which is closer to 16. You’ve never had a bear market bottom with the multiple above the long-run average. That just doesn’t happen.
David Rosenberg: ‘You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios.’
Rosenberg Research
MarketWatch: The market wants a “Powell put” to rescue stocks, but may have to settle for a “Powell pause.” When the Fed finally pauses its rate hikes, is that a signal to turn bullish?
Rosenberg: The stock market bottoms 70% of the way into a recession and 70% of the way into the easing cycle. What’s more important is that the Fed will pause, and then will pivot. That is going to be a 2023 story.
The Fed will shift its views as circumstances change. The S&P 500 low will be south of 3000 and then it’s a matter of time. The Fed will pause, the markets will have a knee-jerk positive reaction you can trade. Then the Fed will start to cut interest rates, and that usually takes place six months after the pause. Then there will be a lot of giddiness in the market for a short time. When the market bottoms, it’s the mirror image of when it peaks. The market peaks when it starts to see the recession coming. The next bull market will start once investors begin to see the recovery.
But the recession’s just starting. The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle when the central bank has cut interest rates enough to push the yield curve back to a positive slope. That is many months away. We have to wait for the pause, the pivot, and for rate cuts to steepen the yield curve. That will be a late 2023, early 2024 story.
MarketWatch: How concerned are you about corporate and household debt? Are there echoes of the 2008-09 Great Recession?
Rosenberg: There’s not going to be a replay of 2008-09. It doesn’t mean there won’t be a major financial spasm. That always happens after a Fed tightening cycle. The excesses are exposed, and expunged. I look at it more as it could be a replay of what happened with nonbank financials in the 1980s, early 1990s, that engulfed the savings and loan industry. I am concerned about the banks in the sense that they have a tremendous amount of commercial real estate exposure on their balance sheets. I do think the banks will be compelled to bolster their loan-loss reserves, and that will come out of their earnings performance. That’s not the same as incurring capitalization problems, so I don’t see any major banks defaulting or being at risk of default.
But I’m concerned about other pockets of the financial sector. The banks are actually less important to the overall credit market than they’ve been in the past. This is not a repeat of 2008-09 but we do have to focus on where the extreme leverage is centered.
It’s not necessarily in the banks this time; it is in other sources such as private equity, private debt, and they have yet to fully mark-to-market their assets. That’s an area of concern. The parts of the market that cater directly to the consumer, like credit cards, we’re already starting to see signs of stress in terms of the rise in 30-day late-payment rates. Early stage arrears are surfacing in credit cards, auto loans and even some elements of the mortgage market. The big risk to me is not so much the banks, but the nonbank financials that cater to credit cards, auto loans, and private equity and private debt.
MarketWatch: Why should individuals care about trouble in private equity and private debt? That’s for the wealthy and the big institutions.
Rosenberg: Unless private investment firms gate their assets, you’re going to end up getting a flood of redemptions and asset sales, and that affects all markets. Markets are intertwined. Redemptions and forced asset sales will affect market valuations in general. We’re seeing deflation in the equity market and now in a much more important market for individuals, which is residential real estate. One of the reasons why so many people have delayed their return to the labor market is they looked at their wealth, principally equities and real estate, and thought they could retire early based on this massive wealth creation that took place through 2020 and 2021.
Now people are having to recalculate their ability to retire early and fund a comfortable retirement lifestyle. They will be forced back into the labor market. And the problem with a recession of course is that there are going to be fewer job openings, which means the unemployment rate is going to rise. The Fed is already telling us we’re going to 4.6%, which itself is a recession call; we’re going to blow through that number. All this plays out in the labor market not necessarily through job loss, but it’s going to force people to go back and look for a job. The unemployment rate goes up — that has a lag impact on nominal wages and that is going to be another factor that will curtail consumer spending, which is 70% of the economy.
“ My strongest conviction is the 30-year Treasury bond. ”
At some point, we’re going to have to have some sort of positive shock that will arrest the decline. The cycle is the cycle and what dominates the cycle are interest rates. At some point we get the recessionary pressures, inflation melts, the Fed will have successfully reset asset values to more normal levels, and we will be in a different monetary policy cycle by the second half of 2024 that will breathe life into the economy and we’ll be off to a recovery phase, which the market will start to discount later in 2023. Nothing here is permanent. It’s about interest rates, liquidity and the yield curve that has played out before.
MarketWatch: Where do you advise investors to put their money now, and why?
Rosenberg: My strongest conviction is the 30-year Treasury bond TMUBMUSD30Y, 3.674%.
The Fed will cut rates and you’ll get the biggest decline in yields at the short end. But in terms of bond prices and the total return potential, it’s at the long end of the curve. Bond yields always go down in a recession. Inflation is going to fall more quickly than is generally anticipated. Recession and disinflation are powerful forces for the long end of the Treasury curve.
As the Fed pauses and then pivots — and this Volcker-like tightening is not permanent — other central banks around the world are going to play catch up, and that is going to undercut the U.S. dollar DXY, +0.70%.
There are few better hedges against a U.S. dollar reversal than gold. On top of that, cryptocurrency has been exposed as being far too volatile to be part of any asset mix. It’s fun to trade, but crypto is not an investment. The crypto craze — fund flows directed to bitcoin BTCUSD, +0.35%
and the like — drained the gold price by more than $200 an ounce.
“ Buy companies that provide the goods and services that people need – not what they want. ”
I’m bullish on gold GC00, +0.22%
– physical gold — bullish on bonds, and within the stock market, under the proviso that we have a recession, you want to ensure you are invested in sectors with the lowest possible correlation to GDP growth.
Invest in 2023 the same way you’re going to be living life — in a period of frugality. Buy companies that provide the goods and services that people need – not what they want. Consumer staples, not consumer cyclicals. Utilities. Health care. I look at Apple as a cyclical consumer products company, but Microsoft is a defensive growth technology company.
You want to be buying essentials, staples, things you need. When I look at Microsoft MSFT, -0.61%,
Alphabet GOOGL, -1.79%,
Amazon AMZN, -1.17%,
they are what I would consider to be defensive growth stocks and at some point this year, they will deserve to be garnering a very strong look for the next cycle.
You also want to invest in areas with a secular growth tailwind. For example, military budgets are rising in every part of the world and that plays right into defense/aerospace stocks. Food security, whether it’s food producers, anything related to agriculture, is an area you ought to be invested in.
You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios. If you follow that you’ll do just fine. I just think you’ll do far better if you have a healthy allocation to long-term bonds and gold. Gold finished 2022 unchanged, in a year when flat was the new up.
In terms of the relative weighting, that’s a personal choice but I would say to focus on defensive sectors with zero or low correlation to GDP, a laddered bond portfolio if you want to play it safe, or just the long bond, and physical gold. Also, the Dogs of the Dow fits the screening for strong balance sheets, strong dividend payout ratios and a nice starting yield. The Dogs outperformed in 2022, and 2023 will be much the same. That’s the strategy for 2023.
Turkey’s lira hit a record low and its stock market tumbled on Monday after a major earthquake killed nearly 1,500 people and wounded thousands of others in the country, piling on further economic hardship in a region already grappling with economic instability and geopolitical turmoil. Another 700 deaths have been reported in Syria, according to Reuters.
The Turkish lira USDTRY, +0.05%
fell to a record low of 18.83 against a strong dollar on Monday, while the country’s major stock index, the Turkey ISE National 100 XU100, -1.35%
— which tracks the performance of 100 companies selected from the National Market, real estate investment trusts and venture capital investment trusts listed on the Istanbul Stock Exchange — tumbled 1.4%.
The iShares MSCI Turkey ETF TUR, -1.88%,
which tracks several dozen Turkish equities, slumped 1.9%.
At least 1,498 people were killed and 8,533 people were injured in Turkey when a magnitude 7.8 earthquake struck central Turkey and northwest Syria early Monday morning, followed by another large quake in the afternoon, according to Yunus Sezer, the head of Turkey’s Disaster and Emergency Management Agency.
The U.S. Geological Survey estimated on Monday that there was a high probability that the economic losses from the initial earthquake could top $1 billion.
The ICE U.S. Dollar Index DXY, +0.72%,
a measure of the currency against a basket of six major rivals, jumped 0.7% on Monday.
Oil futures traded lower as of Monday morning despite news reports that Turkey has halted crude-oil flows to its export terminal in Ceyhan. Turkish pipeline operator BOTAS said there was no damage on main pipelines which carry crude oil from Iraq and Azerbaijan to Turkey, according to Reuters.
Iraq’s semi-autonomous Kurdistan Regional Government has stopped shipments through the pipeline which runs from Iraq’s northern Kirkuk fields to Ceyhan, the region’s ministry of natural resources said on Monday.
That’s the good news. The not-so-good news is that the recent rally may have gotten ahead of itself and a pullback would be health-restoring to the bull market.
Read: Jobs report shows blowout 517,000 gain in U.S. employment in January
U.S. stocks finished higher Friday, as investors weighed a flurry of bank earnings results for the fourth quarter and fresh data on consumer sentiment and inflation expectations.
All three major benchmarks also booked their best weekly percentage gains since Nov. 11, according to Dow Jones Market Data.
How stock indexes traded
The Dow Jones Industrial Average DJIA, +0.33%
rose 112.64 points, or 0.3%, to close at 34,302.61.
The S&P 500 SPX, +0.40%
added 15.92 points, or 0.4%, to finish at 3,999.09.
The Nasdaq Composite COMP, -1.10%
gained 78.05 points, or 0.7%, to end at 11,079.16.
For the week, the Dow rose 2%, the S&P 500 advanced 2.7% and the Nasdaq gained 4.8% gain.
Major stock indexes posted their best week of gains in two months on Friday after companies began reporting their fourth-quarter results, with big banks kicking off the earnings season.
No big surprises have come from the banks’ earnings results so far, with Bank of America Corp. and JPMorgan Chase & Co. indicating a potentially mild recession this year, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial.
“I think the base case for most of the market right now is that we’re going to see a mild recession,” Saglimbene said in a phone interview Friday. “I don’t think anything that was said across bank earnings today surprised investors.”
Typically, the release of megabank earnings marks the unofficial start of the U.S. earnings reporting season, and market analysts will be watching closely this quarter for indications of how America’s largest companies are bracing for an expected economic downturn driven by higher interest rates.
JPMorgan JPM, +2.52%,
Bank of America BAC, +2.20%,
Wells Fargo & Co. WFC, +3.25%
and Citigroup C, +1.69%
were among banks that reported their fourth-quarter earnings Friday. JPMorgan was the top performer in the Dow Jones Industrial Average, with its shares closing 2.5% higher, FactSet data show.
Earnings will continue to be a “big focus” for markets this month, according to Saglimbene. “Analysts took down estimates pretty aggressively in the fourth quarter,” he said. “So the bar is pretty low for companies. We’ll see if they can hurdle past that.”
In U.S. economic data released Friday, the University of Michigan consumer sentiment index climbed in January to its highest level in nine months, as expectations for the rate of inflation one year out moderated.
“Signs that inflation has peaked and is moderating slowly kind of eases some of the anxiety that we’re going to see runaway inflation this year,” said Saglimbene.
A reading from the consumer-price index on Thursday showed U.S. inflation fell in December. Many investors are expecting that the Federal Reserve will slow its pace of interest rate hikes this year as the cost of living has cooled.
Stocks on Thursday pushed higher after St. Louis Federal Reserve Bank President James Bullard said the probability of a soft landing for the economy has increased due to “encouraging” inflation data.
Steve Sosnick, chief strategist at Interactive Brokers, said by phone Friday that he still favors consumer-staples stocks and companies with “more steady streams than more cyclical streams” of income. “If you’re looking at an economy that’s likely to slow down, it’s really hard for me to think that somehow ‘the cyclicals’ will be immune from the economic cycle,” he said.
Wells Fargo WFC, +3.25%
shares rose 3.3% after reporting falling profits, as it was hit by a recent settlement and the need to build reserves.
Bank of America BAC, +2.20%
shares gained 2.2% after reporting earnings per share of 85 cents last quarter, above the 77 cents a share expected by analysts. Revenue also beat expectations. However, the bank’s net interest income fell slightly below expectations despite jumping interest rates.
Delta Air Lines Inc. DAL, -3.54%
reported fourth-quarter profit and revenue before the bell that beat expectations. Shares of the airline fell 3.5%.
