Tracking down fear on Wall Street

The US stock market, as measured by the S&P 500, plunged more than 3 percent yesterday, dragging it deeper into the bear market. Futures markets are pointing to a recovery this morning, but the S&P is still on track to post its 10th weekly decline in the last 11 weeks.

It’s often said that bull markets climb a wall of worry, with the occasional blip along the way. When bear markets rappel, there are also periodic respites. That has been the theme of late, with investors shifting from relief that policymakers are taking aggressive action to curb inflation to fear of the impact those actions could have on economic growth.

One of the best bets of late has been volatility. The VIX volatility index, commonly referred to as the “fear index” because it tracks investor demand for some type of financial instrument that offers protection from market downturns, has more than doubled over the past year to well over 30. The index fell to around 15 at times in the second half of last year, its lowest level since the pandemic began.

The reasons for the down moves in the stock markets are well known at this point:

  • A mix of supply chain issues and a hot economy has sent prices skyrocketing.

  • To fight inflation, the Fed increase in interest rates aggressive.

  • Investors fear the Fed’s efforts could shake the economy recession.

  • There is also a lingering Pandemicand a war in Europe.

The stock market itself can also be an economic concern. Overall, the fall in stocks this year has wiped out about $12 trillion in value from investors’ portfolios. That’s already more than the $8 trillion drop in 2008, during the worst financial crisis in a century, although the percentage drop in 2008 was larger. Over time, the rise and fall of stocks can propel and drag the economy through something economists call the wealth effect — when people feel poorer, they may not spend as much, even if their losses are mostly on paper, which weighs on the economy.

Analysts say the market is unlikely to recover until there are signs that inflation is under control. Lower inflation would, in turn, take the pressure off the Fed and other central banks to raise rates quickly, reversing the negative feedback loop the market and economy seem stuck in.

For now, investors are betting that volatility will continue. When the VIX is peaking, bets on where the index will trade a few months in the future are usually much lower than current levels. That is not the case now. Investors are currently betting that the VIX will end the year just below 30, only slightly lower than today and much higher than the longer term trend. The VIX has averaged around 20 over the past five years.

The Jan. 6 committee hearings will focus on all of the president’s men. A top attorney for former Vice President Mike Pence said Donald Trump and attorney John Eastman had been told Trump’s plan to overturn the 2020 election was illegal. In another twist, YouTube deleted part of the Jan. 6 hearing uploaded by the committee that focused on lies Donald Trump had spread and said the committee was spreading misinformation.

Russia is putting economic pressure on European leaders in Ukraine. While the heads of state of Germany, France and Italy met with Ukrainian President Volodymyr Zelenskyy, Russia halted the flow of Europe’s main natural gas pipeline. The drop in supply pushes up prices, and Russia hinted that more supply cuts would follow.

SpaceX is firing employees who helped draft and distribute a letter denouncing Elon Musk. Gwynne Shotwell, SpaceX’s president and chief operating officer, said in an email to employees that the process of creating and distributing the letter, which described Musk’s behavior as a “distraction and embarrassment,” was “an uncomfortable experience for employees.” , intimidated and bullied feeling”.

Regulators are investigating crypto lender Celsius amid its meltdown. The company faces questions from law enforcement agencies in five states as it struggles to stay solvent. Celsius’ former backers have reportedly told the company that froze payouts that they can’t help. A growing crypto crash has brought heavy losses to retail and professional investors alike.

Michel David-Weill, former chairman of Lazard, has died aged 89. said the company. David-Weill was responsible for uniting Lazard in the 1980s, combining three independent partnerships in London, New York and Paris. “Michel’s presence, leadership and vision defined Lazard today,” bank CEO Ken Jacobs told DealBook, calling David-Weill an “excellent skeptic of conventional wisdom.”

Revlon, the 90-year-old cosmetics brand known for its signature lipstick colors, filed for bankruptcy yesterday. The company is struggling to pay off its $3.8 billion debt. Some of the factors that led to the bankruptcy were unique to Revlon, such as debt-fueled deals led by corporate raider Ron Perelman and a brand that failed to compete against younger, hipper competitors. But others, advisers tell DealBook, are a harbinger of bankruptcies to come. We’re hearing that bankers are already gearing up for a potentially busy fall for those who specialize in distressed debt and workouts.

Many of the insolvencies that we expected for 2020 did not materialize. A number of retailers that were already faltering quickly fell into bankruptcy, such as JCPenney and Neiman Marcus. But the Fed’s cash injection supported companies many expected to file for Chapter 11. (And certain industries, like airlines, have been buffered by government bailouts.) Corporate bankruptcy filings actually fell 5 percent in 2020 and nearly 34 percent in 2021. Some experts warned of the proliferation of zombie firms – companies that make just enough money to survive – and a resulting strain on the economy at large. At the same time, these and other companies continued to incur debt. US corporate bond issuance totaled nearly $2 trillion in 2020.

So far this year, US corporate bond defaults are 40 percent lower than last year, according to S&P Global. So far it has only been 15. But there are signs that that could change soon. The “distress ratio” — the proportion of the junk bond market showing signs of stress, according to S&P — has nearly doubled to 4.3 percent over the past month from 2.4 percent, the biggest monthly jump since March 2020. ( That’s still low compared to historical averages.) And this week alone, investors withdrew $6.6 billion from funds buying US high-yield bonds, making it the worst week for corporate bonds since March 2020.

High inflation, rising interest rates and more cautious consumers could add to the distress. So too are supply chain issues, which pose a particular challenge for companies that don’t have the financial flexibility to pay more for a scarce product or to build and reduce inventory as needed. Retailers, including decoration and holiday chain Party City and department store Belk, will be particularly vulnerable given the heavy debt burden many are struggling with. (And one has to wonder if the recently proposed leveraged takeover of department store chain Kohl’s is really a good idea.)

– Jason Moore, the manager of the Everson Royce Bar in Los Angeles. The return of workers to offices has also contributed to this a revival of the post-work tradition of happy hour.

LIV Golf, a golf series generously funded by Saudi Arabia, is at odds with the PGA Tour, which has suspended 17 of its players for participating in the burgeoning league. Neither antagonist arouses much sympathy, writes Peter Coy, our Times Opinion colleague who writes a newsletter for subscribers, but the fight raises an interesting economic question: Can trade restraint ever be a good thing? We spoke to Peter about what golf’s battle royale can tell us about the state of competition policy.

DealBook: Should the government step in to stop the PGA from banning golfers who join the LIV?

Peter Coy: I think it’s a bit early for that. This is a family feud and players need time to work things out among themselves. If there is a lawsuit I think it will be filed by golfers or maybe LIV Golf. When they see no reason to sue, it’s hard to understand why the government would want to step in.

Do the antitrust issues arising from the PGA-LIV conflict also apply to the debate over whether Facebook, Google and other big tech companies should be considered monopolies and broken up?

Of course there are big differences between golf and tech, but some of the underlying principles are the same. Most antitrust cases are decided on the basis of the “rule of common sense”. An organization accused of anti-competitive behavior, whether it’s the PGA Tour or Google, can get itself out of trouble by showing that its actions are reasonable and actually benefit consumers.

The Biden administration has partially pointed to the recent surge in inflation as evidence that companies have too much power to raise prices. Does the golf industry support this thesis?

In general, I agree that competition drives prices down, but in this case it’s hard to make the connection. I can’t imagine the two groups competing by lowering the prices they charge TV stations, tournament sponsors and so on. In fact, the competition between them results in much larger payouts to golfers. I would expect golfers to spend their newfound wealth on cars and boats. This might be an odd case where competition increases inflation.



  • Importers warn of further delivery delays from a new forced labor law targeting China. (Politics)

  • A surprise Treasury tax windfall could disrupt plans to raise interest rates for the rich. (Politics)

  • Three environmental groups are suing the Biden administration for issuing thousands of fossil fuel drilling permits. (The hill)

  • “49 states have pre-ordered vaccine doses for very young children. Not Florida.” (New York)

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