Economic Data Watch and Market Outlook
For the week, the MSCI World rose 23 basis points with the S&P 500 rising 24 basis points. The Bloomberg US Aggregate Bond Index rose 15 basis points. The ten-year fluctuated during the week as the JOLTS result and the quits rates released earlier in the week seemed to indicate that the job markets were softening as corporations had fewer opportunities available and workers were less likely to leave their post. However, a stronger than expected jobs number on Friday likely continued the “higher for longer” stance in rates.
The US labor force added 199,000 jobs versus an expectation of 185,000. From that result we saw roughly 47,000 added workers returning from the UAW strike. Gains occurred in most sectors with the largest in private education (99,000), healthcare (93,000) and leisure/hospitality 40,000. Losses occurred in retail (-38,000), temp workers (-14,000), and mining ( -1,000). With job growth, the labor force participation rate also increased from 62.7% to 62.8%. Hourly earnings also rose month over month 0.4% versus 0.3%.
US bankruptcy filings are on track to hit their highest levels since the pandemic, due to high interest rates and sticky inflation with WeWork being an example of a company struggling with expensive leases and work from home trends. In November there were 34 bankruptcy petitions according to S&P Global Market Intelligence, bringing the YTD count to 591. Notable companies that have filed this year with over $1B in liabilities include the above-mentioned WeWork, Rite Aid, Bed Bath & Beyond and SmileDirectClub.
The Panama Canal, a key route for global trade for over a century, is now facing challenges due to climate change-induced droughts, leading to lower water levels affecting ship transit. This has resulted in tonnage restrictions and fewer vessels being able to pass through, creating delays and forcing shipping companies to either pay high fees to expedite passage or take longer routes around South America, Africa, or via the Suez Canal. The number of daily transits through the canal has dropped by about one-third since August, and is expected to further decrease, exacerbating the situation as Panama’s dry season approaches and transit restrictions are likely to persist into 2024.
Transit times have been extended and this is likely one factor that has caused a surge in dry bulk goods prices such as iron ore. However, container prices have not yet risen. Industry outlooks see softening as recessionary concerns loom in the space.
Equities
The rally that lifted the Dow Jones Industrial Average and the S&P 500 to new 52-week highs last week following comments from Fed Chair Jerome Powell around the idea of rate cuts was short lived. Most indices fell to start the week as investors waited on signs from the Labor Department that job growth was slowing. Tuesday revealed a larger than expected drop in job openings which pulled rates lower and weighed on major indices as recession fears were revived. Friday’s job report gave a different tone as the report revealed the job market remained resilient. Yields ticked lower which ignited a new rally in tech and growth stocks Thursday that snapped a three-day loss in the S&P 500. Continuing enthusiasm over Artificial Intelligence (AI) appeared to be one factor in boosting growth indices. Shares of Google parent Alphabet rose north of 5% Thursday following the reveal of its new AI model, Gemini, which can process text, code images, audio, and video. Advanced Micro Devices rose almost 10% on Thursday after it announced the launch of a new generation of AI chips. Earlier in the week, Apple again passed $3 trillion in market capitalization and moved back near its summer all-time highs.
For the week the Dow Jones Industrial Average was flat, the S&P 500 gained 0.24% and the Nasdaq rose 0.7%. Small caps outperformed large caps gaining 1.0% versus 0.3% in the Russell 1000. This marks the third time in the last four weeks the Russell 2000 outperformed the S&P 500. In smaller cap stocks, value outperformed growth while the opposite was true in larger cap stocks as growth outperformed value. Market sectors were mixed with consumer discretionary, technology, and communication services outperforming on the week. Energy, materials, and consumer staples finished the week in the red. The energy sector was impacted as crude oil prices briefly dropped below $70 a barrel on slower growth concerns and increased production from non-OPEC countries.
Internationally, developed markets outperformed emerging markets and the Euro STOXX 600 advanced for the fourth straight week rising 1.3%. Stocks appeared to receive a lift from expectations that central banks could cut interest rates next year due to slowing inflation and signs that European economies have been faltering. France’s CAC 40 Index gained 2.5%, Germany’s DAX climbed 2.2%, Italy’s FTSE MIB rose 1.6% and the UK FTSE 100 Index increased 0.3%. In Asia, Japanese stocks lost steam over the week as the Nikkei 225 Index fell (-3.4%) and the TOPIX decreased (-2.4%). The Bank of Japan made comments around speculation of abandoning its policy of negative interest rates earlier than anticipated which weighed on riskier assets. Equities were further pressured as economic data signaled Japan’s economy contracted by more than initially estimated in the third quarter. Chinese equities also fell during the week after a credit downgrade by Moody’s on China’s sovereign debt weighed on domestic markets. The Shanghai Composite dropped (-2.1%) and the blue-chip CSI 300 fell
(-2.4%) after falling to its lowest level in nearly five years this week. In Hong Kong, the Hang Seng Index declined (-3.0%).
Fixed Income
On Friday, a better-than-expected jobs report caused a jump in the 2-year Treasury yield, which rose as much as 14 bps after the 8:30 AM news. The jobs report influenced traders to pull back their expectations on how much the Fed will cut rates next year, with expectations falling from 120 bps to 110 bps of easing. In recent weeks yields have seen a dramatic decline, reaching their lowest levels in several months, with this 14 bps jump being the largest increase in the 2-year since June. Even so, yields ended the week mixed, with the 2-year Treasury yield climbing 15 bps, the 10-year Treasury yield rising only one bp, and the 30-year Treasury yield falling 9 bps. Bond indices inched up slightly as well, as the Bloomberg US Aggregate Bond Index rose +0.15%, the Bloomberg US Corporate High Yield Index rose +0.37%, and the Bloomberg US MBS Index rose +0.14%.
It was big week for yen traders as volume on futures and options hit the highest levels this year on Thursday, with options suggesting bullish sentiment on the currency throughout the rest of the year. $74.8B of yen was traded on Thursday, which included $39.4B of futures contracts and $4.2B of options. The yen jumped 4% in response to Bank of Japan Governor Kazuo Ueda signaling that the end of negative BoJ rates is near. Quick gains in the yen pushed the cost of dollar-yen options to their most expensive level since July while one week volatility hit its highest level in over 4 months.
Petroleos Mexicanos (Pemex) has refinanced $8.3B in revolving credit lines from banks such as JPMorgan Chase, Citigroup, and Banco Bilbao Vizcaya Argentaria as it has been struggling with the oil industry’s largest debt load. Pemex acquired a $6.5B tranche made up of three-year term loans and revolving credit facilities with similar durations at the end of November from several banks including the Bank of Nova Scotia, Citigroup, and JPMorgan.
Hedge Funds as of Thursday, December 7th
For the week from Friday, December 1st through Thursday, December 7th, there was some divergence in hedge fund (HF) returns to start the month as performance of equities across regions was relatively mixed. US & Europe stocks were up while Asia underperformed. When looking at the average global HF and average global long/short (L/S) fund, they were able to capture roughly half of the MSCI’s gains MTD (MSCI World up +25 bps). Americas-based HFs, particularly L/S funds in the region, have had a somewhat impressive start to the month (relative to gains posted by their respective benchmark index). The average US L/S fund is up 60 bps MTD vs. the S&P 500 +40 bps. Outside the US, it has been a challenging start to the month for the group of European-based HFs amidst the Euro STOXX 600 rallying +1.6%, the average EU fund is tracking in negative territory MTD (-30 bps). Performance this month has also been challenged across Asia-based funds with the average Asia-based manager down 70 bps vs. the MSCI Asia Pacific down ~40 bps.
What started out as a somewhat quieter week turned on Thursday, as HFs shifted to buying equities (particularly in North America) in what amounted to the largest day of buying seen in recent months. Nearly all the buying WTD that took place in NA was relatively balanced between long adds vs. short covers. The buying was also evenly split between ETFs (largest in five months) and single-name equities. Going a little deeper into the single-name flow, there was a reversal in flow across the TMT trade. Throughout the past 4-5 months HFs had steadily moderated their positioning tilts to TMT (particularly the subset of mega-cap names), with the selling of these names accelerating in recent weeks (including this past Monday & last Thursday 11/30 – both were among the largest day of selling YTD). This reversed on Thursday amidst the rally in tech, ultimately leaving the net flow flat on a WTD basis. Elsewhere, there was buying of materials and financials, albeit in a relatively limited size. The buying within both sectors was broad-based across most related industries. As for what was sold, there were short adds in energy (has been a persistent trend for the last 2-3 months), with the selling this past week mostly concentrated in integrated oil & gas. As mentioned above, the flow was muted on a directional basis across equites outside of the US. In Europe, HFs trimmed longs and covered shorts in a relatively small but similar amounts. At the sector level, the long selling within Europe was concentrated across financials (banks, capital markets) and energy (integrated oil & gas), resulting in both sectors ending the most sold. Conversely there was buying across defensive-related sectors (real estate, healthcare, utilities), in addition to consumer discretionary and industrials. In broader Asia, the flow was very quiet on both a gross and net basis across AxJ equities, but Japan, on the other hand, was slightly net sold via HFs trimming longs, particularly in consumer staples.
Private Equity
Despite a loss of momentum in 2023, investor interest in GP (General Partner) stakes in private equity remain robust. GP stakes involve dedicated funds acquiring minority shares in other GPs to indirectly access fund returns and balance sheets. According to PitchBook’s Q3 2023 US Public PE and GP Deal Roundup Report, the first 10 months of 2023 witnessed a decline in GP stakes deal activity, with a reduction of 8.3% in deal count and a 25.3% decrease in deal value compared to the previous year.
In Q3, out of 18 deals targeting asset managers, only five occurred through a GP stake. However, there has been a resurgence in GP stakes deal volume in the early weeks of Q4, leading industry players to express optimism about sustained growth in 2024. Selling a minority interest in their business enables GPs to infuse capital, supporting fundraising and deal making efforts. The industry is undergoing an adjustment to the “new normal” in fundraising, considering more modest growth projections and rates.
Noteworthy deals in 2023 include Blackstone’s acquisition of a minority stake in FTV Capital, a $6.2 billion growth equity firm. Blue Owl invested in Stonepeak, and Bonaccord Capital Partners acquired a minority stake in Revelstoke Capital Partners, a healthcare-focused PE firm. The concept of GP stakes, involving the purchase of ownership and non-ownership stakes in asset and wealth managers, originated in the early 2000s and has evolved over time due to consolidation in asset management and persistent fundraising challenges.
Fundraising initiatives for GP stakes are underway, with Blue Owl’s Dyal Capital launching its sixth fund dedicated to GP stakes with a $13 billion target. Despite the temporary slowdown, industry players are optimistic about future GP stakes activity. An evolving trend is observed in the structure of GP stake deals, with GPs exploring alternative methods for liquidity without relinquishing permanent equity ownership. GPs are increasingly realizing they can use collateral for liquidity, potentially leading to more structured equity solutions, including preferred equity and debt, reflecting the evolving capital structures of these businesses.
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Katie Fox, Managing Director
Michael McNamara, Analyst
Sam Morris, Analyst
Josh Friedberg, Fall Associate
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.