Tracking Fear on Wall Street

Wall of worry

The U.S. stock market, as measured by the S&P 500, tumbled more than 3 percent yesterday, dragging it deeper into bear market territory. This morning, futures markets suggest there will be a rebound, but the S&P is still well on track to record its 10th weekly decline of the past 11 weeks.

Bull markets are often said to climb a wall of worry, with occasional slips along the way. When bear markets rappel, there are also periodic pauses for breath. That has been the theme of late, with investors veering from relief that policymakers are taking aggressive actions to rein in inflation to fear about the effect those actions may have on economic growth.

One of the best bets recently has been volatility. The VIX volatility index, which is commonly called the “fear index” because it tracks investors’ demand for a type of financial instrument that offers protection against market drops, has more than doubled in the past year, to well over 30. The index had fallen to around 15 at times during the second half of last year, its lowest level since the start of the pandemic.

The reasons for the stock market’s downward lurches are well established at this point:

• A mixture of supply chain issues and a hot economy has caused prices to surge.

• In order to fight inflation, the Fed is raising interest rates aggressively.

• Investors are worried that the Fed’s efforts will tip the economy into recession.

• There’s also a lingering pandemic, and a war in Europe.

The stock market itself can be an economic concern, too. In all, the drop in stocks this year has erased about $12 trillion in value from investors’ portfolios. That’s already more than the $8 trillion decline in 2008, during the most severe financial crisis in a century, although on a percentage basis the 2008 drop was bigger. Over time, the rise and fall of stocks can propel and drag the economy via something economists call the wealth effect — when people feel poorer, even if their losses are mostly on paper, they may not spend as much, denting the economy.

Analysts say the market isn’t likely to recover until there are signs that inflation is under control. Lower inflation would, in turn, take pressure off the Fed and other central banks to raise rates quickly, reversing the negative feedback loop the market and the economy seem to be stuck in.

For now, investors are betting that volatility is here to stay. Normally, when the VIX spikes, bets on where the index will trade a few months in the future are much lower than the current level. That’s not the case now. Investors are currently betting the VIX will end the year at just under 30, down only slightly from today, and much higher than the longer-term trend. The VIX has averaged about 20 over the past five years.

HERE’S WHAT’S HAPPENING

The Jan. 6 committee hearings focus on all the president’s men. A top lawyer for former vice president Mike Pence said Donald Trump and the lawyer John Eastman were told Trump’s plan to overturn the 2020 election was illegal. In another twist, YouTube deleted a portion of the hearing uploaded by the Jan. 6 committee that focused on lies Donald Trump spread, saying the committee was spreading misinformation.

Russia puts the economic squeeze on European leaders in Ukraine. As the heads of state of Germany, France and Italy met with President Volodymyr Zelensky of Ukraine, Russia cut flows to Europe’s most important natural gas pipeline. The decrease in supply is raising prices, and Russia hinted there would be more supply reductions to come.

SpaceX fires employees who helped write 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 circulating the letter, which called Musk’s behavior a “distraction and embarrassment,” “made employees feel uncomfortable, intimidated and bullied.”

Regulators investigate the crypto lender Celsius amid its meltdown. The company is facing questions from securities law enforcers in five states while scrambling to remain solvent. Celsius’s previous backers have reportedly told the company, which has frozen withdrawals, that they can’t help. A growing crypto crash has caused heavy losses for individual and professional investors.

Michel David-Weill, the former chairman of Lazard, has died at 89, the firm said. 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,” the bank’s C.E.O. Ken Jacobs told DealBook, calling David-Weill an “excellent skeptic of conventional wisdom.”

Is the bankruptcy stampede coming?

Revlon, the 90-year-old cosmetics brand known for its signature shades of lipstick, filed for bankruptcy yesterday. The company has struggled to deal with its $3.8 billion mountain of debt. Some of the factors that led to the bankruptcy were particular to Revlon, like debt-fueled deal-making led by the corporate raider Ron Perelman, and a brand that failed to compete against younger, hipper rivals. But others, advisers tell DealBook, are a harbinger of bankruptcies to follow. We hear bankers are already gearing up for what could be a busy fall for those who specialize in distressed debt and workouts.

Many of the bankruptcies we expected in 2020 did not happen. A number of retailers that were already teetering toppled quickly into bankruptcy, like JCPenney and Neiman Marcus. But the Fed’s infusion of cash sustained companies that many expected to file for Chapter 11. (And certain industries, like airlines, were buffered by government bailouts.) Corporate bankruptcy filings actually fell 5 percent in 2020 and nearly 34 percent in 2021. Some experts warned of a proliferation of zombie firms — companies that make just enough money to survive — and a subsequent drag on the broader economy. At the same time, these companies and others continued to rack up debt. U.S. corporate bond issuance neared $2 trillion in 2020.

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

High inflation, rising interest rates and more cautious consumers may add to the distress. So too will supply chain snarls, which are particularly challenging for companies without the financial flexibility to pay more for a scarce product, or to build and deplete inventory as needed. Retailers will be particularly vulnerable, given the heavy debt load that many are grappling with, including the decorations and festivities chain Party City and the department store Belk. (And one has to wonder whether the recently proposed debt-fueled acquisition of the Kohl’s department store chain is really a good idea.)

“You can definitely tell the difference from the beginning of the year, when everybody was still kind of freaked out from the newest variant. This summer is going to jump off.”

— Jason Moore, the general manager of Everson Royce Bar in Los Angeles. Workers’ return to offices has also led to a rebound in the post-work tradition of happy hour.

What a feud in pro golf says about competition

LIV Golf, a golf series lavishly funded by Saudi Arabia, is feuding with the PGA Tour, which has suspended 17 of its players for taking part in the upstart league. Neither antagonist arouses much sympathy, writes Peter Coy, our colleague from Times Opinion who writes a newsletter for subscribers, but the battle does raise an interesting economic question: Can restraint of trade ever be a good thing? We talked 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 little soon for that. This is a family feud and the players need time to sort things out among themselves. If there is a lawsuit I’d think it would be filed by golfers, or maybe by LIV Golf. If they don’t see a reason to sue, it’s hard to see why the government would want to step in.

Do the antitrust questions that arise from the PGA-LIV clash apply to the debate about whether Facebook, Google and other Big Tech companies should be considered monopolies and broken up?

Obviously there are huge differences between golf and tech but some of the underlying principles are the same. Most antitrust cases are decided based on the “rule of reason.” An organization that’s accused of anticompetitive behavior, whether it’s the PGA Tour or Google, can get out of trouble by showing that its actions are reasonable and actually benefit consumers.

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

In general I agree that competition brings down prices, but in this case, the connection is hard to see. I don’t imagine that the two groups would compete by lowering the prices they charge the TV networks, tournament sponsors and so on. In fact, the competition between them is resulting in much bigger payouts to golfers. I’d expect the golfers to splash out their newfound wealth on cars and boats. This could be a weird case where competition raises inflation.

THE SPEED READ

Deals

Policy

• Importers warn of more supply delays from a new forced labor law targeting China. (Politico)

• A surprise Treasury tax windfall could interfere with plans to raise rates for the rich. (Politico)

• Three environmental groups sued the Biden administration for granting thousands of fossil fuel drilling permits. (The Hill)

• “Forty-nine states preordered vaccine doses for very young children. Florida did not.” (NYT)

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