Private Wealth

Weekly Research Briefing: Storm Brewing

September 26, 2023 | 20 min read

Stock investors have gone on strike and shutdown. Fed up with the line of dominoes being laid out, the CBOE S&P 500 Volatility Index popped from an ultra-low handle of 12 to 16-18 in just 8 days. You know the dominoes: government shutdown, UAW strike, rising Treasury yields, climbing oil prices, resumption of student loan payments, September seasonality and the N.Y. Yankees missing the playoffs. So, stock investors have retreated to their cup of joe until the risks are removed or the dominoes fall creating lower prices. The good news is that credit quality remains solid, credit spreads have stayed tight, and the U.S. economy continues to create many jobs. So, if you are invested into a company, the business is likely doing well right now. If it has a stock price, you might want to ignore it for the time being and pour yourself another cup.

The Fed illustrated this dynamic perfectly last week when their dot plot revealed a "higher for longer" interest rate agenda. Why? Because GDP and job growth have a much better outlook than they were forecasting. The Fed raised its 2023-2025 forecasts for GDP while lowering its unemployment rate forecast. A stronger economy means no collapse in the Fed Funds rate in 2024. Stronger is better if you are an operating company or a lender. This is why credit upgrades are surging and credit spreads are tightening. With the 10-year yield now at 4.5%, consumers and companies will just need to figure out how they are going to borrow and finance themselves in an environment where risk-free rates are back to normal.

Investors are also going to have to figure out how much they want to get paid for risk with Treasuries now yielding 4.5% to 5.5% depending on the maturity. With the S&P 500 sporting a dividend yield of less than 2%, a buyer of stocks is going to demand a very big number for earnings growth. You can find higher earnings growth in some of the mega-cap tech names, but those are valued closer to 40-50x earnings today. For an investor to want to buy equities away from the non-mega cap tech companies, they will need to see clear skies and continued GDP growth. Until then, they will be patient, watch the storms and drink more coffee. At least we will now have the late-night talk shows to keep us company.

To abbreviate, the FOMC says "higher for longer"...

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.“

FOMC Policy Statement

The soft landing continues to be an option...

"The most recent employment report showed a labor market with solid job gains. The average pace of job gains over the past year has slowed somewhat and the labor force participation rate has also improved over the same time frame, a sign that labor market supply and demand may be coming into better balance." - Fed Reserve Governor Bowman

"The Fed is having the desired effect. It's coming back to something that we would view as being a more long-term trend, more normal and the consumer spending 4% more year-over-year. That said, it's difficult to see a U.S. recession when the consumer is spending 4% more year-over-year. So you can sort of see why people talk about pushing out the recession longer in the United States." - Bank of America CFO Alastair Borthwick

The Transcript

The FOMC raises its rate outlook for 2024 and 2025...


  • Raises Median forecast for end-2024 rate 5.125% (prior 4.375%)
  • Raises Median forecast for end-2025 rate 3.875% (prior 3.375%)
  • Affirms Median forecast for Long Run rate 2.50% (prior 2.50%)


And a visual of the 2024 dot hikes...


But the Fed Chairman remains cautious about some of the near-term dominoes...

In his presser last Wednesday, Fed Chair Jerome Powell mentioned "careful" and "carefully" 16 times mostly to describe how the Fed will proceed from here. That sounds like good advice for investors right now. When he was asked about the impact of "external factors" on Fed policy and the economy, he provided a list of five troublesome developments: the UAW strike, a possible government shutdown, resumption of student loan payments, higher long-term rates, and the recent oil price shock. No wonder that "uncertain" and "uncertainty" were mentioned 11 times at the presser.

Yardeni Research

The markets move toward no more rates hikes for this cycle and a first rate cut targeted in the second half of 2024...

@SpecialSitsNews: Rate cut expectations shifted last week, as curves flattened. We went from -79bps by year end ’24 to now -66bps.

Now for the biggest domino, Congress has this week to avoid a U.S. government shutdown...

Leaders of the Republican-controlled House hope they can persuade GOP holdouts to get on board with four full-year bills and a short-term funding patch. With a shutdown set for Oct. 1 unless Congress acts, the plan marks a last-ditch effort by Republicans to find a way forward. If no deal is reached, hundreds of thousands of federal workers are set to be furloughed.


If the pointless U.S. Government shutdown does occur next weekend, here is what is at risk...

One fact that bears repeating is that shutdowns are harmful. With hundreds of thousands of government workers likely to be furloughed — and their paychecks suspended — services for seniors and veterans could be impeded, payments to contractors and vendors deferred, parks and museums shut, health and safety inspections curtailed, scientific research halted, federal investigations tabled, key economic data releases postponed, loans to small businesses cut off, and more. Crucial regulatory functions could be inhibited across the government.

Far from modeling budgetary discipline, these disruptions impose significant costs. An analysis by the Office of Management and Budget found that a shutdown in 2013 led to as much as $6 billion in lost economic output and $2 billion in added government costs over just 16 days. A 2019 Senate staff report found that the last three funding lapses resulted in 56,938 staff-years of lost work at federal agencies. This year’s version could prove costlier still: Each week of a shutdown would cut 0.2 percentage point from quarterly GDP, according to Bloomberg chief US economist Anna Wong.


The screenwriters settled over the weekend and got most of their demands from the studios. The autoworkers strike is much more complicated...

The auto workers strike is filled with wildcards.

A new union boss. Carmakers navigating a costly transition to EVs. Car dealers and auto-parts suppliers caught in the middle. And it is all happening amid a period of drastic change in how cars are made—and how we buy them.

These are some of the key factors driving events as the fight escalates, with the union striking at 38 additional locations on Friday. The UAW has never before conducted walkouts at all three Detroit automakers, Ford, General Motors and Stellantis, at once. United Auto Workers President Shawn Fain is driving that strategy, and has broken with the Detroit union’s traditions in other ways as well.

The union is seeking a 40% pay increase over four years, while the companies are offering 20%. Fain also wants the re-establishment of benefits lost in previous negotiations. Is he asking too much? Detroit’s three car companies are outspending nonunionized rivals on labor costs amid an expensive technological shift, and the UAW’s demands risk pushing those costs higher.


Onto the fuel domino, gasoline prices may have hit their seasonal peak this week as the country shifts to winter blend gasoline...


While absolute gasoline prices are up right now, adjusted for inflation, they are near the 50-year average...


WFH is winding down: 4 million New Yorkers rode the subway last Tuesday & Thursday. Coffee prices slide.

@MikeZaccardi: Coffee prices in August down -23.3% vs. last year

BofA Global Research

A look at American Express' August numbers shows strength in usage and few credit concerns...


  • Net charge off rates: down from 1.8% to 1.7% MoM
  • Percent of loans 30 days past due: up from 1.1% to 1.2% MoMM.


  • Net charge-off rates still at 1.8% MoM
  • Percent of loans 30 days past due: still at 1.2% MoM.


Another sign of a positive job environment: surging employment tax receipts...

@wabuffo: With 7 business days left in Q3, more evidence that the US labor market is heating up. Q3 is coming in 8.8% higher than last year & is the best quarter of the last 4. Only way this is happening is if the US economy is growing faster.

A look at the interest rate domino: Risk-free yields back to their VERY long-term average last week...

Deutsche Bank

The 10-year Treasury yield makes a higher high...

Walter Deemer/

And stock prices make a lower low...

Walter Deemer/

The Goldman Sachs U.S. Financial Conditions index has been tightening, driven by the stronger US dollar, higher Treasury yields, and a slide in stock prices...

The Daily Shot

One of the best signals in the financial markets has been the continued appetite for credit...

BofA Global Research

Demand for credit has been driven by corporate health leading to a wave of debt upgrades...

For years, investors have fretted over the swelling mass of BBB rated bonds in the world of investment-grade credit.

These are corporate bonds that sit at the lowest rung of high grade, just one notch above ‘junk’ status. As such, they’ve been the source of much consternation for anyone worried about a deteriorating credit market, with the proportion of BBB rated bonds in benchmark indices having swelled to a record 51.9% in recent years.

But the tide is turning, according to a new note from Bank of America Corp.

A wave of post-pandemic upgrades means the share of BBB rated bonds in major indices has now dropped to 47.5%, with a stunning $100 billion worth of debt upgraded from the category into single-A this year alone. It’s not what many of the commenters who have been warning of a ‘Triple B Bubble’ may have expected. And it suggests that the so-called bubble may be deflating in a relatively orderly fashion as a slew of BBB companies improve their balance sheets without a dramatic spike in bankruptcies and big market stress.


But with the 10-year Treasury yield at 4.5%, it is going to take more work for investors to buy stocks for their dividends...

Logically, higher bond yields should be bad for stocks. Quite apart from denting economic activity (which they don’t seem to have done as yet), they should do this by increasing the rate at which companies’ future earnings must be discounted, and by providing stiffer competition. The better the yield that’s available from bonds, the argument would go, the more yield you will want from a stock before buying it, and that means that the share price should go down.

There are many ways to measure this, but the simplest is to compare cash payouts — the Treasury yield against the dividend yield on stocks. In recent years, the only times when the income from stocks actually exceeded that from bonds came at moments that proved to be great buying opportunities for equities, in 2009 and 2020. But the bond yield now exceeds dividend yields by the most since before the GFC. In theory, that should mean that stocks’ yields might need to rise a bit, and hence their prices fall:


With the September pullback in the markets, stocks have retreated to a near average 18x forward earnings...

@FactSet: The forward 12-month P/E ratio for $SPX of 18.0 is below the 5-year average (18.7) and above the 10-year average (17.5).

Another reminder that the seven largest stocks are generating all of the YTD performance...

The seven biggest stocks in the S&P500 are up more than 50% in 2023, see chart below. The remaining 493 stocks are basically flat. The bottom line is that if you buy the S&P500 today, you are basically buying a handful of companies that make up 34% of the index and have an average P/E ratio around 50.

Apollo Academy

The long-term trend in the S&P 500 is still positive which means you can't write off the S&P 500 just yet...

@RyanDetrick: When the S&P 500 is up YTD between 10-20% at the end of September, the fourth quarter has been higher 84% of the time. Don't give up on a fourth quarter rally just yet.

Equity shorts have closed their WFH bets on office furniture maker Steelcase after the company raised guidance last week...

@carlquintanilla: Shares of office-furniture maker Steelcase spike 29% on strong guidance -- as office attendance improves. Large companies "recognize that being together is a key contributor to shaping their culture and driving business outcomes."

Also, a mega-cap strategic acquisition announced last week as Cisco writes a $28 billion check...

Cisco announced its biggest acquisition to date, a $28 billion deal to acquire the security software company Splunk. The combination would enable the networking equipment maker to offer customers artificial intelligence and other tools to monitor and analyze data for security issues.

Cisco offered $157 for each Splunk share. The deal is bigger than its $6.9 billion purchase of the cable set-top box maker Scientific Atlanta in 2005 and similar-sized deal for optical networking firm Cerent in 1999. It bought Acacia Communications for $5 billion in 2021.

Cisco Chief Financial Officer Scott Herren told Barron’s the deal will add about $4 billion of annual recurring revenue. It will boost cash flow in the first year after closing, and Cisco expects the deal to accelerate both revenue growth and gross margin expansion.

Herren said Splunk has an “unassailable” position in a market called SIEM, or security information and event management, tracking log files and other data. Having access to that information will help Cisco protect customers from attack, going from “‘detect and respond’ to ‘predict and prevent,’” he said.

Piper Sandler analyst James Fish, who named Splunk among Cisco’s potential M&A targets in 2019, said it was “arguably the best M&A option for Cisco,” filling portfolio holes while being complementary with its existing security business.


"Private Equity Dynamics in a Time of Higher Interest Rates"

I wrote this piece last month for a client who wanted to learn more about how private equity investing reacts to a rising interest rate environment. The paper might be an even more helpful read now that Treasury rates have ticked up another 25 basis points. Click here for the full PDF.

I am often told that private equity has outperformed public equity for the last 40 years because the asset class is a leveraged play on investing in public companies in a world of falling interest rates. And while I wouldn’t argue that 10-year Treasury rates falling from 15% in 1981 to near zero in 2020 has not hurt those who have borrowed money, I would also remind investors that the financial world has seen many different multi-year economic and interest rate environments over the last 40 years. During those many changed environments, investors have won and lost in both their private and public company investments. And they will likely continue to do so if risk free rates find a higher, more sustainable level. But it would be unwise to dismiss private equity investing going forward just because government bond yields are no longer near zero.

Hamilton Lane

And an updated performance reminder for how the long-term private market returns stack up to their public market equivalents...

  • Private equity and private credit historically outperformed over intermediate and long-term time periods on both an absolute and risk-adjusted basis
  • Real estate performance in longer time horizons is heavily influenced by GFC-era funds

Past performance is not an indicator of future results.

Hamilton Lane

Speaking of private credit, there was a big gathering last week in Europe with many positive comments about the asset class...

In a sign of how private equity is rapidly moving beyond its swashbuckling roots in buying large companies, the focus in Paris was squarely on how firms are positioning themselves as an alternative to the traditional banking system, capable of making multibillion-dollar corporate loans.

Jim Zelter, Apollo’s co-president, said that in an era of higher rates there were “unprecedented” returns available in private credit. The New York-based firm is increasingly targeting loans to large companies, according to people familiar with the matter. A recent example includes a €500mn loan to Air France.

Apollo’s private credit unit now manages more than $400bn, dwarfing the $100bn in assets under management in its buyout division, historically the cornerstone of the group’s business.

Blackstone’s founder and chairman Steve Schwarzman also pointed to the profits to be made lending to companies.

“If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?,” Schwarzman told the conference. “If you are living in a no-growth economy and somebody can give you 12, 13 per cent with almost no prospect of loss, that’s about the best thing you can do.”

Financial Times

Almost every company will use AI to accelerate their business model. Here is a customer and supplier...

“We have a small content team and sell 0- to 10-year-old cars—hundreds of makes and models. We wanted reviews on all those cars. It's thousands of reviews and would have taken years for our content team to do. With generative AI, we got all those reviews done in about 90 days.” — CarMax CEO Bill Nash

"I have never seen customer demand like what I’m seeing today. And I’ve worked at all the big three. I’ve never had to do as many board meetings as I’ve had to in the past 160 days. I will tell you—from the developers all the way through the board room—everyone is interested in executing on generative AI and using general AI to transform their business. In that same past 160 days, we’ve come out with over a dozen products. The market for system integrators is extraordinary. Every customer I speak to needs some assistance with doing their first, second, and third-gen AI application and then actually building this at scale inside of the organization...The need from customers from top to bottom is extraordinary. Simply put, the opportunity for SIs to bring more value to their customers has never been greater." - Google AI Head Philip Moyer

The Transcript

Only Skynet could program an AI robotic quarterback to copy this feat...

Someone had better run Tua through a metal detector.

Time to see how we can buy a flaxseed farm...

If baked goods can survive in a world of GLP drugs, then scientists may have found a way to save the rainforests by replacing palm oil.

A Scottish research team believe they may have produced the "holy grail" alternative to palm oil.

It is estimated that almost half of all food and cosmetic products on supermarket shelves contain palm oil.

The huge demand has led to significant deforestation in areas where oil palm trees can grow near the equator.

Food experts at Queen Margaret University (QMU) in Edinburgh say their new 100% plant-based ingredient is 70% better for the environment.

And with 80% less saturated fat and 30% fewer calories, they are also hailing PALM-ALT as a significantly healthier option.

Catriona Liddle, one of the lead developers on the QMU team, said: "It's the holy grail to replace it and still have exactly the same end result in product - to taste the same and have the texture the same - and we've done that...

It is made from a by-product from the linseed industry, plus natural fibre and rapeseed oil.


If you are a season ticket holder of the Denver Nuggets, Miami Dolphins or any other successful team with a hot ticket, get ready for more personal tax accounting...

In the past, ticket-selling platforms were required to send 1099-K forms if a user received more than $20,000 in revenue and had more than 200 transactions. The new law, part of Democrats’ American Rescue Plan Act coronavirus relief package in early 2021, lowers the threshold to $600, irrespective of the number of transactions. The IRS reporting requirement is triggered by the sale price, not the seller’s profit.

The change is meant to make it harder to avoid reporting income from such sales. The new law was scheduled to take effect for tax year 2022, but the IRS paused implementation until 2023. IRS commissioner Danny Werfel indicated that the agency has no plans to grant an additional reprieve. Forms covering the 2023 tax year are slated to be sent in early 2024...

Sellers will only need to pay taxes if they made a profit—if they sold a ticket for more than they paid for it. If an individual sells tickets at a loss, that loss isn’t deductible, and resellers can’t offset gains on some transactions with losses on others. Sellers may still have to report the loss on their tax return if they receive a 1099-K.

Selling tickets at a profit has always counted as taxable income, but the new threshold means the IRS will have an easier time seeing that income and collecting taxes on it.

The IRS plans to provide more guidance and information to taxpayers as tax-filing season nears, Werfel said.


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