TANGLEY, England—Steve Schwarzman once said his business philosophy was to seek war. The Wall Street billionaire may have met his match in the chalk hills of southern England.
One morning in early September, refrigeration consultant Lawrence Leask woke before 3 a.m., got into his car in pajamas and slippers and waited. It wasn’t long before he spotted his quarry, a water tanker passing through this rural parish. Leask tailed it to the town of Andover to learn where it would eventually unload thousands of gallons of water.
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Joe Wallace
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Investors bought up shares of Etsy Inc. on Thursday after the online crafts marketplace added to its board of directors a partner of hedge fund Elliott Investment Management L.P., which recently acquired a “sizable” stake in the company.
Etsy
ETSY,
said Marc Steinberg, who is responsible for public- and private-equity investments at Elliott, has been appointed to the board, effective Feb. 5, and will also join the board’s audit committee.
“Etsy has a highly differentiated position in the e-commerce landscape and a uniquely attractive business model, supported by a distinctive and engaged community,” Steinberg said. “We became a sizable investor in Etsy and I am joining its board because I believe there is an opportunity for significant value creation.”
Etsy’s stock shot up 8% in afternoon trading, to pare earlier gains of as much as 14.2%. The stock was headed for its best one-day gain since it climbed 9.2% on July 11.
Elliott’s stake was acquired in recent months, as the fund’s disclosure of equity holdings through the third quarter did not list Etsy shares.
“Marc’s appointment reflects our ongoing commitment to enhance the perspectives and expertise on the Etsy Board,” said Etsy Chairman Fred Wilson. “We look forward to benefiting from his voice in the boardroom as a seasoned and experienced investor as we continue our journey of creating a leading global e-commerce platform.”
Etsy now has 10 board members.
Etsy’s stock has run up 18.6% over the past three months, but has tumbled 48.5% over the past 12 months. That’s compared with the S&P 500 index’s
SPX
18.7% rally over the past year.
Read (December 2023): Etsy to cut 11% of staff as CEO says company is on ‘unsustainable trajectory’
At an investor conference in December, Chief Executive Josh Silverman said business has slowed since the post-pandemic boom, as people have “had enough of buying things” and are now spending primarily on eating out and travel. Inflation and the loss of government subsidies was also weighing on spending.
Still, Silverman said, Etsy is now about two and a half times bigger than it was before the pandemic, and the company has more active buyers than it did at the peak of the pandemic.
JetBlue Airways Corp. and Spirit Airlines Inc. said late Friday that they have appealed a court ruling that earlier this week blocked their planned merger.
JetBlue
JBLU,
and Spirit
SAVE,
announced the appeal in a terse press release that provided no more details, adding only that the process is “consistent with the requirements of the merger agreement.”
Wall Street was split on whether the airlines would be legally obliged to appeal the Tuesday ruling, which sided with the Justice Department in saying that a merger between low-cost JetBlue and ultra-low-cost Spirit would hurt competition.
Shares of Spirit rallied 12% after hours Friday, while JetBlue shares fell nearly 2%. Analysts at JP Morgan said this week that the ruling freed JetBlue from a “costly merger.”
Earlier Friday, Spirit sought to reassure investors about its liquidity and issued an upbeat fourth-quarter revenue guidance. Spirit has amassed about $5.5 billion in debt, and is reportedly seeking advisers to help restructure it.
The likelihood of Spirit attracting a new merger or takeover bid is considered low without a debt restructuring. Frontier Group Holdings Inc.
ULCC,
and JetBlue competed for Spirit in 2022, with Frontier ultimately bowing out in July of that year.
Raymond James analyst Savanthi Syth said in a note earlier Friday that it was “clear to us that Spirit is pressing JetBlue to appeal the antitrust ruling, but we continue to believe the chances of success are low.”
Syth has estimated that an appeal would take some four to five months.
Shares of Spirit have lost 67% in the past 12 months, while shares of JetBlue are down 41%. The U.S. Global Jets ETF
JETS
has lost 9% in the same period. Those losses contrast with gains of 24% for the S&P 500 index
SPX.
Distressed-debt giant Oaktree Capital sees big opportunities in credit unfolding over the next few years as a wall of debt comes due.
Oaktree’s incoming co-chief executives Armen Panossian, head of performing credit, and Bob O’Leary, portfolio manager for global opportunities, see a roughly $13 trillion market that will be ripe for the picking.
Within that realm is high-yield bonds, BBB-rated bonds, leveraged loans and private credit — four areas of the market that have only mushroomed from their nearly $3 trillion size right before the 2007-2008 global financial crisis.
“Clearly, the most acute area of risk right now is commercial real estate,” the co-CEOs said in a Wednesday client note. “That’s because the maturity wall is already upon us and it’s not going to abate for several years.”
More than $1 trillion of commercial real-estate loans are set to come due in 2024 and 2025, according to the Mortgage Bankers Association.
A retreat in the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y,
to about 4.1% on Wednesday from a 5% peak in October, has provided some relief even though many borrowers likely will still struggle to refinance.
Related: Commercial real estate a top threat to financial system in 2024, U.S. regulators say
“There’s a need for capital, especially for office properties where there are vacancies, rental growth hasn’t materialized, or the rate of borrowing has gone up materially over the last three years. This capital may or may not be readily available, and for certain types of office properties, it absolutely isn’t available,” the Oaktree team said.
With that backdrop, the firm expects to dust off its playbook from the financial crisis and acquire portfolios of commercial real-estate loans from banks, but also plans to participate in “credit-risk transfer” deals that help lenders reduce exposure.
Oaktree also sees opportunities brewing in private credit, as well as in high-yield and leveraged loans, where “several hundred” of the estimated 1,500 companies that have issued such debt are likely “to be just fine” even if defaults rise, they said.
Another area to watch will be the roughly $26 trillion Treasury market, where Oaktree has some concerns “about where the 10-year Treasury yield goes from here” — given not only the U.S. budget deficit and the deluge of supply that investors face, but also how foreign buyers, once the “largest owners in prior years, may be tapped out.”
Related: Here are two reasons why the 10-year Treasury yield is back above 4%
U.S. stocks
SPX
COMP
fell Wednesday after strong retail-sales data for December pointed to a resilient U.S. economy, despite the Federal Reserve having kept its policy rate at a 22-year high since July.
TOKYO (AP) — Asian shares slid Wednesday after a decline overnight on Wall Street and disappointing China growth data, while Tokyo’s main benchmark momentarily hit another 30-year high.
Japan’s benchmark Nikkei 225
NIY00,
reached a session high of 36,239.22, but reverted lower, last down 0.3% to 35,477. The Nikkei has been hitting new 34-year highs, or the best since February 1990 during the so-called financial bubble. Buying focused on semiconductor-related shares, and a cheap yen helped boost exporter issues.
Don’t miss: Wall Street firms catch up to Buffett enthusiasm on Japan as Nikkei keeps hitting records
Hong Kong’s Hang Seng
HK:HSCI
tumbled 4% to 15,220.72, with losses building after data showed China hitting its economic growth target of 5.2% for 2023, surpassing government expectations, but short of the 5.3% some analysts expected. The Shanghai Composite
CN:SHCOMP
shed 2% to 2,833.62.
Read on: China hit its economic-growth target without ‘massive stimulus,’ boasts Premier Li Qiang
Australia’s S&P/ASX 200
AU:ASX10000
slipped 0.2% to 7,401.30. South Korea’s Kospi
KR:180721
dropped 2.4% to 2,435.90.
Investors were keeping their eyes on upcoming earnings reports, as well as potential moves by the world’s central banks, to gauge their next moves.
Wall Street slipped in a lackluster return to trading following a three-day holiday weekend.
See: What’s next for stocks as ‘tired’ market stalls in 2024 ahead of closely watched retail sales
The S&P 500
SPX
fell 17.85 points, or 0.4%, to 4,765.98. The Dow Jones Industrial Average
DJIA
dropped 231.86, or 0.6%, to 37,361.12, and the Nasdaq
COMP
sank 28.41, or 0.2%, to 14,944.35.
Spirit Airlines
SAVE,
lost 47.1% after a U.S. judge blocked its takeover by JetBlue Airways
JBLU,
on concerns it would mean higher airfares for flyers. JetBlue rose 4.9%.
Stocks of banks were mixed, meanwhile, as earnings reporting season ramps up for the final three months of 2023. Morgan Stanley
MS,
sank 4.2% after it said a legal matter and a special assessment knocked $535 million off its pretax earnings, while Goldman Sachs
GS,
edged 0.7% higher after reporting results that topped Wall Street’s forecasts.
Companies across the S&P 500 are likely to report meager growth in profits for the fourth quarter from a year earlier, if any, if Wall Street analysts’ forecasts are to be believed. Earnings have been under pressure for more than a year because of rising costs amid high inflation.
But optimism is higher for 2024, where analysts are forecasting a strong 11.8% growth in earnings per share for S&P 500 companies, according to FactSet. That, plus expectations for several cuts to interest rates by the Federal Reserve this year, have helped the S&P 500 rally to 10 winning weeks in the last 11. The index remains within 0.6% of its all-time high set two years ago.
Treasury yields
BX:TMUBMUSD10Y
have already sunk on expectations for upcoming cuts to interest rates, which traders believe could begin as early as March. It’s a sharp turnaround from the past couple years, when the Federal Reserve was hiking rates drastically in hopes of getting high inflation under control.
The Tell: No rate cuts in 2024? Why investors should think about the ‘unthinkable.’
Easier rates and yields relax the pressure on the economy and financial system, while also boosting prices for investments. And for the past six months, interest rates have been the main force moving the stock market, according to Michael Wilson, strategist at Morgan Stanley.
He sees that dynamic continuing in the near term, with the “bond market still in charge.”
For now, traders are penciling in many more cuts to rates through 2024 than the Fed itself has indicated. That raises the potential for big market swings around each speech by a Fed official or economic report.
Yields rose in the bond market after Fed governor Christopher Waller said in a speech that “policy is set properly” on interest rates. Following the speech, traders pushed some bets for the Fed’s first cut to rates to happen in May instead of March.
On Wall Street, Boeing fell to one of the market’s sharper losses as worries continue about troubles for its 737 Max 9 aircraft following the recent in-flight blowout of an Alaska Air
ALK,
jet. Boeing
BA,
lost 7.9%.
In energy trading, benchmark U.S. crude
CL00,
lost 90 cents to $71.75 a barrel. Brent crude
BRN00,
the international standard, fell 78 cents to $77.68 a barrel.
In currency trading, the U.S. dollar
USDJPY,
rose to 147.90 Japanese yen from 147.09 yen. The euro
EURUSD,
cost $1.0868, down from $1.0880.
MarketWatch contributed to this report
The Securities and Exchange Commission on Friday said that a social-media post on X falsely stating that it had approved spot bitcoin exchange-traded funds was created after an “unauthorized party” obtained control over the phone number connected with the agency’s account on the platform.
The markets regulator said its staff would “continue to assess whether additional remedial measures are warranted” in the wake of the breach, which occurred Tuesday and raised questions about cybersecurity at both the agency and the social-media platform, formerly known as Twitter.
The agency said it was coordinating with law enforcement on the matter, including with the FBI and the Department of Homeland Security.
“Commission staff are still assessing the impacts of this incident on the agency, investors, and the marketplace but recognize that those impacts include concerns about the security of the SEC’s social media accounts,” the SEC said in a statement.
The confusion began on Tuesday afternoon, when the hacked post appeared on the SEC’s X account.
“Today the SEC grants approval for #Bitcoin ETFs for listing on registered national securities exchanges,” the post read. “The approved Bitcoin ETFs will be subject to ongoing surveillance and compliance measures to ensure continued investor protection.”
A second post appeared two minutes later that simply read “$BTC,” the SEC noted in its statement. The unauthorized user soon deleted that second post, but also liked two other posts by non-SEC accounts, according to the agency. The price of bitcoin
BTCUSD,
rose sharply in the wake of the posts, before soon pulling back.
In response to the hack, SEC staff posted on the official X account of SEC Chair Gary Gensler announcing that the agency’s main account had been compromised, and that it had not yet approved any spot bitcoin exchange-traded products. Staff then deleted the initial unauthorized post, un-liked the liked posts and used the official SEC account to make a new post clarifying the situation, the agency said Friday.
The SEC also said that it had reached out to X for assistance Tuesday in the wake of the incident, and that agency staff believe the unauthorized access to the SEC’s account was “terminated” later in the day.
“While SEC staff is still assessing the scope of the incident, there is currently no evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts,” the agency said.
The following day, the SEC announced that it had, in fact, approved the listing and trading of spot bitcoin ETFs.
Wednesday’s move marked a breakthrough for the crypto industry, which for years has tried to get such ETFs off the ground in hopes of drawing more traditional investors to the digital-asset space.
Bitcoin was down 7.6% over a 24-period as of Friday evening.
After long-awaited spot bitcoin exchange-traded funds made their debut this week, investors are now weighing the prospects of eventual approval of similar ether ETFs.
The U.S. Securities and Exchange Commission on Wednesday greenlighted 11 spot bitcoin
BTCUSD,
ETFs for the first time. The products, which made its debut trading on Thursday, logged a relatively strong first day.
However, bitcoin fell 6.8% on Friday, leaving it with a 3.2% gain over the past seven days, according to CoinDesk data. It underperformed ether
ETHUSD,
which rose 17.6% over the past seven days while it declined 1.2% on Friday.
The news about bitcoin ETFs was mostly priced in, while investors are now looking past it to a potential approval of ether ETFs, analysts said.
“I see value in having an ETH ETF,” Larry Fink, chief executive at the world’s largest asset manager BlackRock, told CNBC’s Squawk Box on Friday. BlackRock, which just launched its iShares bitcoin Trust
IBIT,
in November filed an application for a spot ether ETF.
“It’s hard to know exactly what the U.S. regulators would do” about ether ETF applications, said Alonso de Gortari, chief economist at Mysten Labs, an internet infrastructure company.
However, “I would expect that once you open the door, it becomes easier and I think the industry is very excited about it,” de Gortari said. If bitcoin ETFs see an impressive institutional inflow in the coming months, it could make such products more established and set a good precedent for other crypto ETF applications, he said.
Also see: Why the debut of bitcoin ETFs could be bad news for crypto stocks, futures ETFs
The enormous competition and huge inflows into bitcoin ETFs will only boost investors’ interests in an ether ETF, according to Paul Brody, EY’s global blockchain leader. “There’s no doubt that ETH is the next big market and has immediately become a priority for financial services companies,” Brody said in emailed comments.
Compared with bitcoin, the Ethereum blockchain offers more utility and has unique advantages, noted Fadi Aboualfa, head of research at digital assets custodian Copper.
Sandy Kaul, head of digital asset and industry advisory services at Franklin Templeton, said she eventually expects the arrival of ETFs that track a basket of cryptocurrencies. Such products, instead of those based on single crypto, would dominate the space if they are approved, she said.
“Just like the S&P 500 has 500 stocks in it, right? You don’t have just one stock.” Kaul said in a phone interview. The arrival of a bitcoin ETF, is just a “baby step into really beginning to think about the future market structure of crypto,” Kaul added.
However, not everyone is that optimistic. Will McDonough, founder and chairman of Corestone Capital, said the approval of an Ethereum ETF has “a long way to go.”
SEC chairman Gary Gensler previously said bitcoin was the only cryptocurrency he was prepared to publicly label a commodity, rather than a security.
The agency also went after companies that offered crypto staking, which allows investors to earn yields by locking their coins to secure blockchains such as Ethereum. The SEC shut down crypto exchange Kraken’s staking business in the U.S. last year.
One possibility is that “companies will be able to offer an ETH ETF, but they will not be allowed to stake that ETH and earn yield,” noted EY’s Brody.
Updated Jan. 11, 2024 3:06 pm ET
Bitcoin’s trip to Main Street just took a detour.
Vanguard said Thursday it won’t offer the new spot bitcoin exchange-traded funds on its brokerage platform.
Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
On Wednesday, the U.S. Securities and Exchange Commission for the first time greenlighted several exchange-traded funds investing directly in bitcoin.
But the 24 hours leading up to that approval were chaotic, to say the least.
The SEC approved the launch of 11 bitcoin
BTCUSD,
ETFs, according to a filing posted on the regulatory agency’s website. The ETFs are due to start trading on Thursday.
On Tuesday, however, the SEC’s official account on X, formerly known as Twitter, published what the agency described as an “unauthorized” post indicating that it had approved the spot bitcoin ETFs. In reality, the regulator had not approved any such ETFs as of Tuesday and its X account had been “compromised,” SEC Chair Gary Gensler said on the social-media platform. The SEC subsequently deleted the unauthorized post.
The agency found “there was unauthorized access to and activity on” the its X account by “an unknown party,” an SEC spokesperson said on Tuesday, adding that the “unauthorized access has been terminated” and that the SEC would work with law enforcement to investigate the matter.
Bitcoin’s price briefly shot 2% higher after the unauthorized tweet went out on Tuesday before soon pulling back.
Then on Wednesday, shortly before the U.S. stock market closed for the day, the SEC posted an actual approval order of bitcoin ETFs on its website — but the link was soon broken, leading to an “error 404” page. The same filing was later reposted by the SEC.
It is unclear why the first link was broken. A SEC spokesperson did not respond to an email seeking comment on the matter.
The events of the past 24 hours have proven “a bit embarrassing” for the SEC, especially as the agency has stressed that cryptocurrencies are exceptionally risky and vulnerable to market manipulation, according to Greg Magadini, director of derivatives at Amberdata.
Despite those warnings, Magadini said he doesn’t expect investors to be deterred from investing in the bitcoin ETFs.
Bitcoin has actually seen lower volatility on Tuesday and Wednesday than options traders had priced in, Magadini said. The crypto was up about 0.4% over the past 24 hours to around $46,400 on Wednesday evening, according to CoinDesk data.
Investors have been pricing in $1 to $2 billion of initial flows into the bitcoin ETFs.
Read: Bitcoin in spotlight as SEC approves new ETFs, ether rallies. Here’s why.
Steven Lubka, head of private clients and family offices at Swan Bitcoin, echoed Magadini’s point, noting that the hiccups on the way to SEC approval are unlikely to impact investor interest in the funds.
“Ultimately, the SEC is not the one that launches the ETFs,” Lubka said in a call. “If anything, it shows how much attention is on these ETF products.”
Updated Jan. 10, 2024 5:56 pm ET
The U.S. Securities and Exchange Commission voted Wednesday to allow mainstream investors to buy and sell bitcoin as easily as stocks and mutual funds, a decision hailed by the industry as a game changer.
The SEC decision clears the way for the first U.S. exchange-traded funds that hold bitcoin to be sold to the public. Expectations of U.S. regulatory approval for such funds drove the price of bitcoin to the highest level in about two years. The digital currency fell to just below $46,000 late Wednesday, up from $17,000 in January 2023.
Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Shares of Medical Properties Trust plummeted after the real estate investment trust said it is ramping up efforts to recover uncollected rent and outstanding loans from its largest tenant.
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The traditional portfolio of stocks and bonds has been on a tear over the past two months as the S&P 500 nears a record high, but it’s the big gains in fixed income that stand out, according to Bespoke Investment Group.
Fixed-income assets are typically the “insurance” part of the classic 60-40 portfolio, usually holding up during market weakness even if that wasn’t the case in 2022, Bespoke said in a note emailed Thursday. Both stocks and bonds in the U.S. have rallied during the fourth quarter and are up so far in 2023.
“With just two trading days left in the year, the market is on the verge of history,” Bespoke said. “After being written off for dead in the last year, the traditional 60/40 portfolio of 60% stocks and 40% bonds is within a whisker of its best two-month rally since at least 1990.”
Read: ‘The switch was flipped’: ETF flows pick up as stocks, bonds head for 2023 gains
In 2022, bonds failed to provide a cushion in the 60-40 portfolio as the Federal Reserve aggressively raised interest rates to battle surging inflation. Stocks and bonds tanked last year, with the S&P 500
SPX
seeing its ugliest annual performance since 2008, when the global financial crisis was wreaking havoc in markets.
Over the past two months, the classic 60-40 mix has seen a gain of 12.16% based on the total returns of the S&P 500 and Bloomberg Aggregate Bond Index, according to Bespoke. The current rolling two-month performance is stronger than gains seen in the two-month rally after the onset of the Covid-19 pandemic through May 2020, the firm found.
“The only other period that was better for the strategy was the two months ending in April 2009,” the firm said. “Back then, the strategy rallied 12.25%, so if the next two trading days even see marginal gains, the current rally will set the record.”
The Vanguard Total Bond Market ETF
BND
and iShares Core U.S. Aggregate Bond ETF
AGG
have each seen a total return of slightly more than 7% this quarter through Wednesday, according to FactSet data.
That puts the Vanguard Total Bond Market ETF on track for its best quarterly performance on record, while the iShares Core U.S. Aggregate Bond ETF is heading for its biggest total return since 2008, FactSet data show. The iShares Core U.S. Aggregate Bond ETF gained a total 7.4% in the fourth quarter of 2008.
In April 2009, “the bond leg” of the 60-40 portfolio was up just 1.87% on a rolling two-month basis, while in May 2020 it gained 2.25%, the Bespoke note shows.
“During this current period, bonds have rallied an unprecedented 8.87%, which far exceeds any other two-month period since at least 1990,” the firm said. “While they still underperformed stocks in the last two months, they have never acted as a smaller drag on the strategy during a period of strength.”
Bespoke found that the S&P 500, a gauge of U.S. large-cap stocks, is up 14.35% over the last two months on a total-return basis, “which is certainly strong relative to history but not anywhere close to a record.”
The U.S. stock market was trading slightly higher on Thursday afternoon, with the S&P 500 up 0.2% at around 4,791, according to FactSet data, at last check. That’s within striking distance of the index’s closing peak of 4,796.56, reached Jan. 3, 2022, according to Dow Jones Market Data.
As stocks were inching higher Thursday afternoon, shares of both the Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond ETF were trading down modestly, according to FactSet data, at last check.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was rising about seven basis points on Thursday afternoon, at around 3.85%, but is down so far this quarter, FactSet data show. Bond yields and prices move in opposite directions.
Bond prices are rallying as many investors anticipate the Fed is done hiking rates — and may begin cutting them sometime next year — as inflation has fallen significantly from its 2022 peak.
As for year-to-date gains, the S&P 500 has surged 26.6% on a total-return basis through Wednesday, while the iShares Core U.S. Aggregate Bond ETF has gained a total 6.1% over the same period, FactSet data show.
Yields on 3-month
BX:TMUBMUSD03M
and 6-month
BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.
Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.
Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average
DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.
“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.
New York Fed President John Williams on Friday tried to temper speculation about rate cuts, but as Tipp argued, Williams also affirmed the central bank’s new “dot plot” reflecting a path to lower rates.
“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.
When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.
Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.
FRED data
“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”
Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s
BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.
“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.
“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.
“What we are witnessing,” he said, “is a repositioning for that.”
The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.
The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.
Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.
Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.
“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”
Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.
With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.
The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.
“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.
U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.
The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500
SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.
The Nasdaq Composite Index
COMP
advanced 2.9% for the week and the small-cap Russell 2000 index
RUT
outperformed, gaining 5.6% for the week.
Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years
Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.
The stocks of long-neglected small companies are finally showing signs of life as the market rally broadens. But these tiny companies still remain vastly undervalued. So, they are one of the best buys in the stock market right now.
Small- and medium-cap companies, or smidcaps, have not been this cheap since the Great Financial Crisis 15 years ago. “Smidcaps relative to large caps look very attractive,” says says portfolio manager Aram Green, at the ClearBridge Select Fund LBFIX, which specializes in this space. “Over the long term you will be rewarded.”
Green is worth listening to because he is one of the better fund managers in the smidcap arena. ClearBridge Select beats both its midcap growth category and Morningstar U.S. midcap growth index over the past five- and 10 years, says Morningstar Direct. This is no easy feat, in a mutual fund world where so many funds lag their benchmarks.
The timing for smidcap outperformance seems about right, since these stocks do well coming out of recessions. Technically, we have not recently had a recession. But there was an economic slowdown in the first half of the year, and the U.S. did have an earnings recession earlier this year. So that may count.
To get smidcap exposure, consider the funds of outperforming managers like Green, and if you want to throw in some individual stocks, Green is a great guide on how to find the best names in this space.
I recently caught up with him to see what we can learn about analyzing smidcaps. Below are four tactics that contribute to his fund’s outperformance, with nine company examples to consider.
1. Look for an entrepreneurial mindset: Green’s background gives him an edge in investing. He’s an entrepreneur who co-founded a software company called iCollege in 1997. It was bought out by BlackBoard in 2001. He knows how to understand innovative trends, identify a good idea, secure capital and quickly ramp up a business. This experience gives him a “private market mindset” that helps him pick stocks to this day.
“Founder-run companies regularly outperform.”
Green looks for managers with an entrepreneurial mindset. You can glean this from company calls and filings, but it helps a lot to meet management — something most individual investors cannot do. But Green offers a shortcut, one which I regularly use, as well. Look for companies that are run by founders. This will give you exposure to managers with entrepreneurial spirit.
Here, Green cites the marketing software company HubSpot
HUBS,
a 1.9% fund position as of the end of the third quarter. It was founded by Massachusetts Institute of Technology college buddies Brian Halligan and Dharmesh Shah. They’re on the company’s board, and Shah is chief technology officer.
Academic studies confirm founder-run companies regularly outperform. My guess is this is because many founders never lose the entrepreneurial spirit, no matter how easy it would be to quit and sip Mai Tai’s on a beach after making a bundle.
In the private market, Green cites Databricks, a data management and analytics company with an AI angle. This competitor of Snowflake
SNOW,
is likely to go public in 2024. If you feel like an outsider because you lack access to private market investing, note that Green says he typically buys more exposure to private companies on the initial public offering (IPO), and then in the market. “We like to spend time with them when they are private so we can pounce when they are public,” Green says.
2. Look for organic growth: When companies make acquisitions their stocks often decline, and for good reason. Managers make mistakes in acquisitions because they overestimate “synergies.” Or they get wrapped up in ego-enhancing empire building.
“We favor entrepreneurial management teams that do not make a lot of acquisitions to grow, but use their resources to develop new products to keep extending the runway,” says Green.
Here, he cites ServiceNow
NOW,
which has grown by “extending the runway” with new offerings developed internally. It started off supporting information technology service desks, and has expanded into operations management of servers and security, onboarding employees, data analytics, and software that powers 911 emergency call systems. Green obviously thinks there is a lot more upside to come, given that this is an overweight position, at 4.6% of the portfolio (the fund’s biggest holding).
Green also puts the “Amazon.com of Latin America” MercadoLibre
MELI,
in this category, because it continues to expand geographically and in areas such as logistics and payment systems. “They have really morphed into a fintech company,” Green says. He puts HubSpot and the marketing software company Klaviyo
KVYO,
in this category, too.
3. Look for differentiated business models: Green likes companies with offerings that are special and different. That means they’ll take market share, and face minimal competition. They’ll also enjoy pricing power. “This leads to high margins. You don’t have someone beating you up on price,” he says.
Green cites the decking company Trex
TREX,
which offers composite decking and railing made from recycled materials. This gives it an eco-friendly allure. Compared to wood, composite material lasts longer and requires less maintenance. It costs more up front but less over the long term. Says Green: “The alternative decking market has taken about 20% of the market and that can get to 50%.”
Of course, entrepreneurs notice success, and try to imitate it. That’s a risk here. But Trex has an edge in its understanding of how to make the composite material. It has a strong brand. And it is building relationships with big-box retailers Home Depot and Lowe’s. These qualities may keep competitors at bay.
4. Put some ballast in your portfolio: Green likes to keep the fund’s portfolio balanced by sector, size, and business dynamic. So the portfolio includes the food distributor Performance Food Group
PFGC,
The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
MNST,
also offers ballast. Monster’s popular product line up helps the company to take share and enjoy pricing power, Green says.
It’s admittedly unusual to see a food companies in a portfolio loaded with high-growth tech innovators. But for Green, it’s all part of the game plan. “Rapid growth, disrupting businesses are not going to work year in year out. There are times they fall out of favor, like 2022. So, having that balance is important because it keeps you invested in the equity market.”
In other words, keeping some ballast means you’re less likely to get shaken out by sharp declines in high-growth and high-beta tech innovators when trouble strikes the market.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, TSLA and MELI. Brush has suggested AMZN, TSLA, NOW, MELI, HD and LOW in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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It’s filing season for a string of major hedge funds, and big tech names like Apple, Microsoft, and Nvidia were among the most-traded equities in the third quarter.
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