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  • How to navigate market risk from interest rates, the economy and politics in 2024

    How to navigate market risk from interest rates, the economy and politics in 2024


    As the U.S. Federal Reserve’s three-year reign in the headlines potentially comes to an end, an analysis of this year’s market themes can offer valuable insights for predicting trends and ensuring attractive returns in 2024.

    Beyond the central bank’s actions, pivotal factors shaping the investment landscape this year include fiscal policies, election outcomes, interest rates and earnings prospects.

    Throughout 2023, a prominent theme emerged: that equities are influenced by factors beyond monetary policy. That trend is likely to persist. 

    A decline in interest rates could significantly increase the relative valuations of equities while simultaneously reducing interest expenses, potentially transforming market dynamics. Contrary to consensus estimates, 2023 brought a more robust earnings rebound, leaving analysts optimistic about 2024.

    The 2024 U.S. presidential election, meanwhile, introduces a new element of uncertainty with the potential to cast a shadow over the market during much of the coming year. 

    Choppy trading, modest earnings growth

    Anticipating a choppy first half of the year due to sluggish economic growth, we see a better opportunity for cyclicals and small-cap stocks to rebound in the latter part of the year. As uncertainty around the election and recession fears dissipate, a broad rally that includes previously ignored cyclicals and small-caps should help propel the S&P 500
    SPX
    higher. 

    Broader macroeconomic conditions support mid-single-digit growth in earnings per share throughout 2024. Factors such as moderate economic expansion, controlled inflation and stable interest rates are expected to provide a conducive environment for companies, enabling them to sustain and potentially improve their earnings performance. We estimate EPS growth of 6.5%. This projected growth aligns with the broader market sentiment indicating a steady upward trajectory in earnings for the upcoming year, fostering investor confidence and supporting valuation expectations across various sectors.

    “ If the economy has not been in recession at the time of the first rate cut but enters one within a year, the Dow enters a bear market.”

    When it comes to U.S. stock-market performance around rate cuts, the phase of the economic cycle matters. When there has been no recession, lower rates have juiced the markets, with the Dow Jones Industrial Average
    DJIA
    rallying by an average of 23.8% one year later.

    If the economy has not been in recession at the time of the first cut but enters one within a year, the Dow has entered a bear market every time, declining by an average of 4.9% one year later. Our base case is a soft landing, but history shows how critical avoiding recession is for the bull market as the Fed prepares to ease policy.   

    Big on small-caps

    This past year has posed a hurdle for small-cap stocks due to the absence of a driving force. These stocks typically perform better as the economy emerges from a recession. While they are currently undervalued, their earnings growth has been notably lacking. If concerns about a recession diminish, a normal yield curve could serve as a potential catalyst for small-cap stocks.

    Growth vs. value

    The ongoing outperformance of megacap growth stocks that we saw in 2023 might hinge on their ability to sustain superior earnings growth, validating their current valuations. Defensive sectors in the value category, meanwhile, are notably oversold and might exhibit strong performance, particularly toward the latter part of the first quarter. Should concerns about a recession dissipate, cyclical sectors within the value category could outperform, particularly if broader market conditions turn favorable in the latter half of the year.

    Handling uncertainty

    The Fed’s enduring influence regarding the prospect of a soft landing in 2024 remains a pivotal point in the market’s focus. Considering the themes of the past year and the multifaceted influences on equities beyond monetary policy, investors are advised to navigate through uncertainties stemming from unintended fiscal shifts, upcoming elections and the impact of fluctuating interest rates. While a potentially choppy start to the year is anticipated, it could create opportunities for cyclical and small-cap stocks later in the year.

    Ed Clissold is chief of U.S. strategies at Ned Davis Research.

    Also read: Mortgage rates dip after Fed meeting. Freddie Mac expects rates to decline more.

    More: After the Fed’s comments, grab these CD rates while you still can



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  • November's rally just erased two months of Fed tightening, economist says

    November's rally just erased two months of Fed tightening, economist says

    Financial conditions are now looser than in September, says economist

    Financial conditions in the U.S. are looser than in September, says economist.


    Getty Images

    The feel-good tone gripping markets in the home stretch of 2023 may not be what the Federal Reserve had penciled in for the holidays.

    The stock market in December, once again, has been knocking on the door of record levels, driven by optimism about easing inflation and potential Fed rate cuts next year.

    But while the prospect of double-digit equity gains this year would be a reprieve for investors after a brutal 2022, the latest rally also points to looser financial conditions.

    Ultimately, the risk of looser financial conditions is that they could backfire, particularly if they rub against the Fed’s own goal of keeping credit restrictive until inflation has been decisively tamed.

    Read: Inflation is falling but interest rates will be higher for longer. Way longer.

    Specifically, the November rally for the S&P 500 index
    SPX
    can be traced to the 10-year Treasury yield
    BX:TMUBMUSD10Y
    dropping to 4.1% on Thursday from a 16-year peak of 5% in October.

    Falling 10-year Treasury yields from a 5% peak in October coincides with a sharp rally in the S&P 500 at the tail end of 2023.


    Oxford Economics

    The Fed only exerts direct control over short-term rates, but 10-year and 30-year Treasury yields
    BX:TMUBMUSD30Y
    are important because they are a peg for pricing auto loans, corporate debt and mortgages.

    That makes long-term rates matter a lot to investors in stocks, bonds and other assets, since higher rates can lead to rising defaults, but also can crimp corporate earnings, growth and the U.S. economy.

    Michael Pearce, lead U.S. economist at Oxford Economics, thinks the November rally may put Fed officials in a difficult spot ahead of next week’s Dec. 12 to 13 Federal Open Market Committee meeting — the eighth and final policy gathering of 2023.

    “The decline in yields and surge in equity prices more than fully unwinds the tightening in conditions seen since the September FOMC meeting,” Pearce said in a Thursday client note.

    The Fed next week isn’t expected to raise rates, but instead opt to keep its benchmark rate steady at a 22-year high in a 5.25% to 5.5% range, which was set in July. The hope is that higher rates will keep bringing inflation down to the central bank’s 2% annual target.

    Ahead of the Fed’s July meeting, stocks were extending a spring rally into summer, largely driven by shares of six meg-cap technology companies and AI optimism.

    From June: Nvidia officially closes in $1 trillion territory, becoming seventh U.S. company to hit market-cap milestone

    Rates in September were kept unchanged, but central bankers also drove home a “higher for longer” message at that meeting, by penciling in only two rate cuts in 2024, instead of four earlier. That spooked markets and triggered a string of monthly losses in stocks.

    Pearce said he expects the Fed next week to “push back against the idea that rate cuts could come onto the agenda anytime soon,” but also to “err on the side of leaving rates high for too long.”

    That might mean the first rate cut comes in September, he said, later than market odds of a 52.8% chance of the first cut in March, as reflected by Thursday by the CME FedWatch Tool.

    Stocks were higher Thursday, poised to snap a three-session drop. A day earlier, the S&P 500 closed 5.2% off its record high set nearly two years ago, the Dow Jones Industrial Average
    DJIA
    was 2% away from its record close and the Nasdaq Composite Index
    COMP
    was almost 12% below its November 2021 record, according to Dow Jones Market Data.

    Related: What investors can expect in 2024 after a 2-year battle with the bond market

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  • Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

    Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

    Neuberger Berman, an asset manager with eight decades under its belt, is on the lookout for cracks in credit markets from the Federal Reserve’s rate-hiking campaign.

    Erik Knutzen, chief investment officer of multi asset, worries that several factors could be a tipping point for the economy, from an economic slowdown in China to U.S. consumers finally becoming exhausted by higher rates.

    Yet Knutzen expects the high-yield, or junk bond, market to serve as the “canary in the coal mine” for broader market volatility, acting as “perhaps the most visible threat, and therefore one we think could be priced in sooner than later.”

    The Bloomberg U.S. High Yield Bond Index has returned 6.4% through the end of August, producing one of the year’s highest gains in fixed income, helped along by a “resilient U.S. economy coupled with still-available financial liquidity,” according to the Wells Fargo Investment Institute.

    But Knutzen worries that as the high-yield maturity wall draws closer, “the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings.”

    The 10-year Treasury yield’s
    BX: TMUBMUSD10Y
    climb to a multidecade high in August of almost 4.4% left many major U.S. corporations in early September hesitant to borrow beyond 10 years.

    Starting next year, some $700 billion of high-yield bonds are set to mature through the end of 2027, with a big slice of the refinancing need coming from companies with riskier credit ratings below the top BB ratings bracket.

    The junk-bond maturity wall.


    Bloomberg, Wells Fargo Investment Institute, Moody’s Investors Service

    The two big U.S. exchange-traded funds linked to junk bonds are the SPDR Bloomberg High Yield Bond ETF
    JNK
    and the iShares iBoxx $ High Yield Corporate Bond ETF
    HYG,
    both up 1.8% and 1.5% on the year through Monday, respectively, while offering dividend yields of more than 5.8%, according to FactSet.

    Of note, fixed-income strategists at the Wells Fargo Investment Institute also said they see risks emerging in junk bonds for companies rated B and below, particularly with spread in the sector trading less than 400 basis points above the risk-free Treasury rate since July. Spreads are the premium that investors are paid on bonds to help compensate for default risks.

    Top corporate executives appear hopeful that the Federal Reserve will cut rates sooner than later. Fed Chairman Jerome Powell said in Jackson Hole, Wyo., in August that the central bank is prepared to keep its policy rate restrictive for a while to get inflation down to its 2% target.

    To that end, Neuberger Berman, which has roughly $443 billion in managed assets, sees several sources of volatility lurking through year’s end, and has a “defensive inclination” in equity and credit, favoring high-quality companies with plenty of free cash flow, high cash balances and less expensive long-term debt.

    U.S. stocks booked gains on Monday after a week of losses, with the S&P 500 index
    SPX
    and Nasdaq Composite Index
    COMP
    scoring their best daily percentage gains in about two weeks. The Dow Jones Industrial Average
    DJIA
    advanced 0.3%.

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  • What’s missing for investors in new $60 billion corporate borrowing blitz

    What’s missing for investors in new $60 billion corporate borrowing blitz

    Another big corporate borrowing blitz to kick off September has gotten under way, but this one isn’t looking like the rest.

    Instead, the flurry of new bond issues shows how the Federal Reserve’s higher interest rate environment has begun to seep in a year later, by making major companies far more hesitant to tap credit for longer stretches.

    “The…

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  • Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The U.S. Labor Day holiday will mark another milestone in the marathon to bring workers back to the office, but it won’t be a quick fix for landlords, according to Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics.

    Employers from Facebook parent Meta
    META,
    +0.27%
    to Goldman Sachs
    GS,
    -0.26%
    recently laid out mandates for staff to return to the office more frequently, starting this fall, including the big one — the federal government.

    “A lot of companies are saying that after Labor Day, ‘We expect more out of you,” LaSalvia said, referring to days in the office. Still, office attendance, he argues, likely only stages a fuller comeback if a job or promotion is on the line.

    Amazon.com Inc.’s
    AMZN,
    +2.18%
    Chief Executive Andy Jassy has been trying to drive home the point by warning staff to return at least three days a week, or face the consequences.

    That could prove difficult, with Friday’s U.S. jobs report for August expected to show U.S. unemployment at a scant 3.5%, near the lowest levels since the late 1960s, even if hiring has been slowing. The labor market, so far, appears unfazed by the Federal Reserve’s benchmark rate reaching a 22-year high.

    It has been a different story for landlords facing a roughly 19% vacancy rate nationally and piles of debt coming due, especially for owners of older Class B and C office buildings with a bleak outlook or properties in cities with wobbling business centers.

    See: San Francisco’s office market erases all gains since 2017 as prices sag nationally

    As with shopping malls, LaSalvia said it’s largely a problem of oversupply, with many office properties at risk of becoming obsolete as tenants flock to better buildings and locations staging a rebirth. The trend can be traced in leasing data since 2021, with Class A properties in central business districts (blue line) showing a big advantage over less desirable buildings in the heart of cities (orange line).

    Return to office isn’t going to save the entire office property market


    Moody’s Analytics

    “Little by little, we are finding the office isn’t dead,” LaSalvia said, but he also sees more promise in neighborhoods with a new purpose, those catering to hybrid work and communities that bring people together.

    Another way to look at the trend is through rents. Manhattan’s Penn Station submarket, with its estimated $13 billion overhaul and neighboring Hudson Yards development, has seen asking rents jump 32% to $74.87 a square foot in the second quarter since the fourth quarter of 2019, according to Moody’s Analytics. That compares with a 2% bump in asking rents in downtown New York City to $61.39 a square foot for the same period.

    The push for a return to the office also doesn’t mean a repeat of prepandemic ways. Goldman Sachs analysts estimate that part-time remote work in the U.S. has stabilized around 20%-25%, in a late August report, but that’s still up from 2.6% before the 2020 lockdowns.

    Furthermore, the persistence of remote work will likely add another 171 million square feet of vacant U.S. office space through 2029, a period that also will see tenants’ long-term leases expire and many companies opting for less space. The additional vacancies would roughly translate to 57% of Los Angeles roughly 300 million square feet of office space sitting empty.

    “The fundamental reason why we had offices in the first place have not completely disintegrated,” LaSalvia said. “But for some of those Class B and C offices, the writing was on the wall before the pandemic.”

    U.S. stocks were mixed Thursday, but headed for losses in a tough August for stocks, with the S&P 500 index
    SPX
    off about 1.5% for the month, the Dow Jones Industrial Average
    DJIA
    2.1% lower and the Nasdaq Composite
    COMP
    down 2% in August, according to FactSet.

    Related: Some employers mandate etiquette classes as returning office workers walk barefoot, burp loudly and microwave fish

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  • With house prices this high, boomers may want to become renters

    With house prices this high, boomers may want to become renters

    If you’re a retiree and you’re trying to square the circle of rising costs, longer lifespans, more expensive medical care and turbulent markets, don’t be afraid to run the numbers on your biggest investment.

    That would be your home — if you own it.

    U.S. house prices are now so high that it is almost impossible for seniors not to ask themselves the obvious question: “Should we cash in, invest the money, and rent?”

    Right now the average U.S. house price is nearly $360,000. That’s about a third higher than just a few years ago, before the COVID-19 pandemic. The lockdowns, the panic, the stimulus checks and 2.5% mortgage rates have all passed into history. But the sky-high prices remain — for now.

    After several years of double-digit percentage increases, apartment-rent growth is falling for only the second time since the 2008 financial crisis. WSJ’s Will Parker joins host J.R. Whalen to discuss.

    At these levels, analysts at Realtor.com — which, like MarketWatch, is owned by News Corp.
    NWSA,
    +1.13%
    — say that in 45 out of 50 major U.S. metropolitan areas it is cheaper to rent than it is to buy a starter home. The Atlanta Federal Reserve Bank says national housing affordability is abysmal — about where it was in 2006 and 2007, during the big housing bubble.

    There is a similar story for seniors. Federal data show that the average U.S. house price is now nearly 17 times the average annual Social Security benefit — an even higher ratio than it was in August 2008, just before Lehman Brothers collapsed. At that juncture, the average house price was 15 times higher.

    U.S. National Home Price Index vs. average rent of primary residence in U.S. city, according to the U.S. Bureau of Labor Statistics. Indexed: January 1987=100.


    S&P/Case-Shiller

    Our simple chart, above, compares average U.S. home prices with average U.S. rents, going back to 1987. (The chart simply shows the ratio, indexed to 100.) The bottom line? House prices are very high at the moment compared with rents — again, prices are about where they were in 2006-07.

    And the two must run in tandem over the long term, because the economic value of owning a house is not having to pay rent to live there.

    If there are times when, in general, it makes more financial sense for seniors to rent than to own, this has to be one of those.

    Seniors who own their own homes may think high interest rates on new mortgages don’t affect them. They most likely either already have a mortgage at a lower, older rate or they’ve paid off their home loan. But if you want to sell, you’ll almost certainly be selling to someone who needs a mortgage.

    If borrowing costs drive down real-estate prices, seniors who hold off on selling may miss out on gains they may never see again. After the last housing peak, in 2006, it took a full decade for prices to recover fully. Those who sold when the going was good had the chance to buy lifetime annuities at excellent rates or to invest in stocks and bonds that overall rose about 80% over the same period.

    As I mentioned recently, there is a broad basket of real-estate trusts on the stock market that are publicly traded landlords. You can sell your home and invest in thousands at a click of a mouse.

    But should you?

    Incidentally, there is also an exchange-traded fund that invests in residential REITs, Armada’s Residential REIT ETF
    HAUS,
    -0.53%    ,
    though in addition to single-family homes and apartment-complex operators, about 25% of the fund is invested in companies involved in manufactured-home parks and senior-living facilities.

    For each person, the math will be different, and there are a number of questions you need to ask. Where do you want to live? How much would you get if you sold your house? How much would you pay in taxes? How much would it cost to rent the right place? Do you want to leave a property to your heirs? And what would be the costs of moving — both financial and emotional?

    The conventional wisdom is that you should own your home in retirement.

    “I would advise any and all retirees against renting if at all possible,” says Malcolm Ethridge, a financial planner at CIC Wealth in Rockville, Md. “You need your costs to be as fixed as possible during retirement, to match your income being fixed as well. If you choose to rent, you’re leaving it up to your landlord to determine whether and by how much your No. 1 expense will increase each year. And that makes it very tough to determine how much you are able to allocate toward everything else in your budget for the month.”

    A key point here, from federal data, is that nationwide rents have risen year after year, almost without a break, at least since the early 1980s. They even rose during the global financial crisis, with just one 12-month period where they fell — and then by only 0.1%.

    “My general advice for clients is that owning a home with no mortgage in retirement is the best scenario, as housing is typically the highest cost we pay monthly,” says Adam Wojtkowski, an adviser at Copper Beech Wealth Management in Mansfield, Mass. “It’s not always the case that it works out this way, but if you can enter retirement with no mortgage, it makes it a lot easier for everything to fall into place, so to speak, when it comes to retirement-income planning.”

    “Renting comes with a lot of risk,” says Brian Schmehil, a planner with the Mather Group in Chicago. “If you rent, you are subject to the whims of your landlord, and a high inflationary environment could put pressure on your finances as you get older.”

    But it’s not always that simple.

    “With housing costs as high as they are now though, renting may be a viable solution, at least for the moment,” says Wojtkowski. “We don’t know what the housing-market trends will be going forward, but if someone is waiting for a housing-market crash before they move, they could very likely be waiting for a long time. We just don’t know.”

    “Any decision comes with pros and cons,” says Schmehil. “Selling when your home values are historically high and renting allows you to capture the equity in your home, which is usually a retiree’s largest or second-largest financial asset. These extra funds allow you to spend more money on yourself in retirement without having to worry about doing a reverse mortgage or selling later in retirement, when it may be harder for you to do so.”

    Renting also allows you to be more flexible about where you live, for example nearer your children or grandchildren, he adds.

    And as any experienced property owner knows, renting also brings another benefit: You no longer have to do as much work around the house.

    “Renting is great in that you don’t need to maintain a residence,” says Ann Covington Alsina, a financial planner running her own firm in Annapolis, Md. “If the dishwasher breaks or the roof leaks, the landlord is responsible.”

    Wojtkowski agrees, noting that many people no longer want to spend time mowing the lawn or shoveling snow in retirement. “Ultimately, one of the things that I’ve seen most retirees most concerned with is eliminating the general upkeep [and] maintenance of homeownership in retirement,” he says.

    Several planners — including Covington Alsina and Wojtkowski — note that one alternative to selling and renting is simply downsizing. This can free up capital, especially when home prices are high, like now, without leaving you exposed to rising rents.

    Many baby boomers have been doing exactly that. 

    Meanwhile, I am reminded of my late friend Vincent Nobile, who — after a long and fruitful life owning homes and raising a family — found himself widowed and alone in his 80s. He rented a small cottage on a New England sound and said how glad he was that he never had to worry about maintaining the roof or the appliances, or fixing the plumbing or the heating, or any one of a thousand other irritations. Or paying property taxes — which go down even more rarely than rents.

    When the regular drives to Boston got too onerous, he moved into the city and rented there. And he was glad to do it. The money he had made was all in investments — a lot less hassle both for him and his heirs.

    I once asked him if he would prefer to own his own home. He shook his head and laughed.

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  • How to win a bidding war on an in-demand house, according to real-estate mogul Barbara Corcoran

    How to win a bidding war on an in-demand house, according to real-estate mogul Barbara Corcoran

    Bidding wars are back, as limited housing-market inventory pits buyers against each other. To compete — and certainly to win — buyers need to come fully prepared, Barbara Corcoran says.

    Despite a sharp rise in the 30-year mortgage rate to nearly 7%, buyers aren’t able to catch a break, due to a shortage of listings. Competition for homes…

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  • The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

    The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

    The Federal Reserve will meet on Wednesday and, for once, the outcome is unclear.

    This is the most uncertain Fed meeting since 2008, said Jim Bianco, president of Bianco Research.

    Fed officials, starting with former chair Ben Bernanke, have perfected the art of having the market price in what the central bank will do — at least regarding interest rates — at each upcoming meeting. That has happened 100% of the time, Bianco said on Twitter.

    The Fed’s meeting this week is different because it follows the sudden collapse of confidence in the U.S. banking system following the government takeover of Silicon Valley Bank as well as the tremors around the world that have led to the shotgun wedding of Swiss banking giant Credit Suisse and its longtime rival, UBS.

    At the moment, the market probabilities are 73% for a quarter-percentage-point move and 27% for no move, according to the CME FedWatch tool. The market seems to be growing in confidence of a hike, analysts said, based on movements on the front end of the curve.

    The Fed’s decision will come on Wednesday at 2 p.m. Eastern and will be followed by a press conference from Fed Chair Jerome Powell.

    “Depending on your perspective, the Fed’s decision will be seen as either capitulation to the markets or ivory-tower isolation from the markets,” said Ian Katz, a financial sector analyst with Capital Alpha Partners.

    Here are the pros and cons for both a pause and a 25-basis-point hike.

    The case for and against a pause

    The main rationale for a pause is that the banking system is under stress.

    “While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient. We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now,” said Jan Hatzius, chief economist at Goldman Sachs, in a note to clients Monday morning.

    Former New York Fed President William Dudley said he would recommend a pause. “The case for zero is ‘do no harm,’” he said.

    The case against a pause is that it could spark more worries about the banking system.

    “I think if they pause, they are going to have to explain exactly what they are seeing, what is giving them more concern. I am not sure a pause is comforting,” said former Fed Vice Chair Roger Ferguson in a television interview on Monday

    The case for and against a 25-basis-point hike

    The main reason for a quarter-percentage-point rate increase, to a range of 4.75%-5%, is that it could project confidence.

    “What you need from policymakers is steady hands, steady ship,” said Max Kettner, chief multi-asset strategist at HSBC. “You don’t need overaction … flip-flopping around in projections or opinions.”

    The Fed should say that it has managed to contain confidence so far and that “we can press ahead with the inflation fight,” he added.

    Oren Klachkin, lead U.S. economist at Oxford Economics, said he didn’t think “the recent bank failures pose systemic risks to the broad financial system and economy.”

    He noted that “inflation is still running hot” and the Fed has better ways to alleviate banking-sector stress than interest rates.

    The case against hiking is that doing so could further exacerbate concerns about the stability of the banking sector.

    “A rate hike now might have to be quickly reversed to deal with a deeper, less contained recession and disinflation. Why would the Fed raise rates when it may be forced to cut rates so much sooner than previously hoped?” asked Diane Swonk, chief economist at KPMG.

    Gregory Daco, chief economist at EY, said he thinks economic activity is slowing, which gives the Fed time.

    “There is no rush to hike. We are not going to see hyperinflation as a result,” he said.

    Stocks
    DJIA,
    +1.20%

    SPX,
    +0.89%
    rose Monday. The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.485%
    inched up to 3.46%, still well below the 4% level seen prior to the banking crisis.

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  • SVB Financial bonds sink to 31 cents on the dollar after failure of Silicon Valley Bank

    SVB Financial bonds sink to 31 cents on the dollar after failure of Silicon Valley Bank

    Heavy trading in SVB Financial Group’s
    SIVB,

    debt pulled its BBB-rated 10-year bonds as low as 31 cents on the dollar on Friday after subsidiary Silicon Valley Bank was closed by regulators, marking the biggest bank failure since the financial crisis.

    The Santa Clara, Calif.–based financial-services company has been reeling in recent days, with both its stock and bond prices hit hard, after it on Thursday disclosed a $1.8 billion loss from a sale of about $21 billion in securities.

    Its bond prices lost further ground Friday after the California Department of Financial Protection and Innovation closed Silicon Valley Bank, placing the Federal Deposit Insurance Corp. in control of its assets.

    Silicon Valley Bank had an estimated $209 billion in total assets and about $175.4 billion in deposits as of Dec. 31, according to the FDIC.

    SVB Financial’s 4.57% bonds due April 2023 traded as low as 31 cents on the dollar on Friday in heavy trading, according to BondCliq. Since the low, the debt traded up to 38.50 cents. A week ago it was fetching 90 cents. Prices on U.S. corporate bonds below 70 cents on the dollar are broadly considered distressed.

    Worries about distress at Silicon Valley Bank, and potential risks in the broader distress in the banking system, have weighed on shares and the debt of financial companies.

    Bonds in the financial sector were broadly under pressure Friday, including debt issued by Bank of America Corp.
    BAC,
    -0.97%    ,
    JPMorgan Chase and Co.
    JPM,
    +2.70%    ,
    Goldman Sachs Group Inc.
    GS,
    -3.69%    ,
    Morgan Stanley
    MS,
    -1.56%
    and other major banks, according to BondCliq.

    Shares of the Invesco KBW Bank ETF
    KBWB,
    -3.26%
    were down 16% on the week through midday Friday, with some investors expressing concern about potential cracks in the financial system following a year of aggressive interest-rate hikes by the Federal Reserve.

     Barclays analysts said Friday that they viewed the collapse of Silicon Valley Bank as an “isolated event, but that it still “raises risks of broader distress within the banking system” that could throw cold water on talk of a Fed interest-rate hike in March of 50 basis points vs. 25 basis points.

    “Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs, more elevated longer-term rates exerting pressure on asset valuations, and potential loan losses related to idiosyncratic credit exposures.”

    Shares of SBV Financial were halted Friday, but they are down about 54% on the year, according to FactSet. The S&P 500 index
    SPX,
    -1.11%
    was down about 1.2% Friday afternoon, while the Dow Jones Industrial Average
    DJIA,
    -0.82%
    fell 0.8% and the Nasdaq Composite
    COMP,
    -1.47%
    was 1.7% lower.

    Deep Dive: 10 banks that may face trouble in the wake of the SVB Financial Group debacle

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  • Jobless claims jump to 211,000, the highest since Christmas. Blame New York.

    Jobless claims jump to 211,000, the highest since Christmas. Blame New York.

    The numbers: The number of Americans who applied for unemployment benefits in early March jumped to a 10-week high of 211,000. Yet most of the increase was concentrated in New York and might not signal a broader cooling-off trend in the U.S. labor market.

    New U.S. applications for benefits rose 21,000 from 190,000 in the prior week, the government said Thursday. The numbers are seasonally adjusted.

    It’s the first time in eight weeks claims have topped the 200,000 mark.

    An unusually big increase took place in New York. Raw or actual unemployment applications in the state jumped to 30,241 from 13,878 in the prior week.

    Chief economist Stephen Stanley of Santander U.S. Capital Markets said school workers in New York City are allowed by contract to apply for benefits during winter and spring breaks.

    Asked about the upsurge, a government spokesperson said by email that “the New York State Department of Labor cannot speculate on the increase.”

    California also posted a sizable pickup, perhaps a sign that the recent spate of major corporate layoffs are starting to bite. A number of large tech firms have announced job cuts since last fall.

    The number of people applying for jobless benefits is one of the best barometers of whether the economy is getting better or worse. New unemployment applications remain near historically low levels, however.

    Economists polled by The Wall Street Journal had forecast new claims to total 195,000 in the seven days ending March 3.

    Key details: Thirty-seven of the 53 U.S. states and territories that report jobless claims showed an increase last week. Seventeen posted a decline.

    Most states aside from New York and California reported little change.

    The number of people collecting unemployment benefits across the country, meanwhile, rose by 69,000 to a two-month high of 1.72 million in the week ending Feb. 25. That number is reported with a one-week lag.

    These continuing claims are still low, but a gradual increase since last spring suggests it’s taking longer for people who lose their jobs to find new ones.

    Big picture: Jobless claims are one of the first indicators to emit danger signals when the U.S. is headed toward recession.

    So far, jobless claims remain remarkably low and the economy is still adding plenty of jobs. Economists estimate that the U.S. gained 225,000 new jobs in February.

    Economists expect hiring to slow and layoffs to increase later in the year, however, as rising interest rates restrain the economy and reduce demand for workers. A number of large companies, especially in tech, media and finance, have already announced job cuts.

    Looking ahead: “Absent [New York], the count would likely have been below 200,000 yet again,” Stanley of Santander said.

    “Broadly, initial jobless claims have remained remarkably low despite the flurry of layoff announcements in recent months, underscoring that the labor market retains considerable momentum.”

    Market reaction: The Dow Jones Industrial Average
    DJIA,
    -1.66%
    and S&P 500
    SPX,
    -1.85%
    rose in Thursday trades.

    Wall Street is hoping for signs of cooling in the labor market, which would discourage the Federal Reserve from raising interest rates more aggressively. The Fed is raising rates to snuff out inflation and reduce upward pressure on wages.

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