Moody's Warning To Investors

By Matthew Gutierrez, Shawn O'Malley, and Weronika Pycek · September 28, 2023

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Folks, the results are in.

Yesterday, we posed a simple question: “About where do you think the S&P 500 will end this year?”

Some bearish sentiment is in the air. About 30% of you chose “below 4,000” — a roughly 6%+ drop from here. But ~23% of you are more optimistic, calling for a rally of at least 5% by New Year’s Day.

?? “Unemployment rates are rising in 48 states and consumer sentiment is low,” one reader wrote. “The recessional headwinds of the housing market will be more pronounced in 2023, and I do not think the Fed will ride in to save us.”

Have something to add? Hit reply to this email and let us know.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• What the looming government shutdown means
• Moody’s warns of systemic risks in markets
• What’s behind oil’s recent surge

All this, and more, in just 5 minutes to read.

POP QUIZ

Where are the world’s smallest stock markets? (Read to the end to find out!)

CHART OF THE DAY

IN THE NEWS

?? What the Looming Government Shutdown Means for Markets

As you’ve probably seen, the government will shut down on Sunday, Oct. 1, unless Congress passes spending legislation. We’ll spare you all the political details and cut right to the chase:

Here’s what the shutdown could mean for your wallet and the broader economy.

• Federal employees would see delayed paychecks or be furloughed until the shutdown ends. About 1.3 million military personnel on active duty would stay on the job but receive pay.
• Airport waits could grow longer, and federal agencies will have reduced customer service crews. Benefits for veterans and certain farmers might also be impacted. And the IPO market might grind to a halt.
• Section 8 housing vouchers could be delayed, and about 7 million people would likely see aid delayed for programs providing federal funds to low-income families.
• About 90% of U.S. Department of Education staff might be furloughed as student loan payments restart. Got a federal student loan payment question? It might be challenging to get immediate answers from a skeleton staff.

Wait, what’s a shutdown anyway? A government shutdown temporarily ceases the federal government’s nonessential operations. Each year, Congress must pass legislation to fund the federal government for the next fiscal year. If legislators can’t pass everything on time, a shutdown ensues.

There have been 14 shutdowns since 1980, and the U.S. lost about $3 billion during the last shutdown, Dec. 22, 2018 to Jan. 25, 2019 — the longest shutdown in U.S. history at 35 days. The longer the shutdown, the greater the costs.

Why it matters:

It’s not all bad news, at least for the stock market. The S&P 500 rose more than 10% during the most recent shutdown, and the average return during shutdowns is about 0.04%.

Big picture: If history is any guide, not even the U.S. government’s dysfunction can meaningfully pull down stocks — it’s safe to say most investors don’t want to test the limits of that, though.

• We’re probably in the clear if it’s only a two- or three-week shutdown, but anything longer than a month or two could add significant headwinds to families and the economy.
• A lengthy shutdown would coincide with high gasoline prices, one of the most unaffordable housing markets in U.S. history, sticky inflation, the Fed’s “higher for longer” interest rate forecast, and declining consumer sentiment. Oh, that’s all?

READ MORE!

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?? Moody’s Warns of Systemic Risks

Moody’s is warning about “systemic risk” in the leveraged lending market.

Let’s break that down:

1. Moody’s is one of three big credit ratings agencies in the U.S., assessing financial health and risks throughout the economy.
2. Systemic risks are, well, very bad — no bueno.

And the leverage lending market? It’s like the flipside of private equity (we’re oversimplifying!)

Private equity investors are notorious famous for borrowing lots of money to ‘buyout’ and take over companies to do things like remove top-level executives, gut the company’s operations for profitability’s sake, or push the business in a new direction, among other reasons.

• To be these “Barbarians at the Gate” — to reference a famous book detailing the industry’s corporate raiding endeavors — someone must lend them money to snap up businesses.
• For example, look no further than Elon Musk — he borrowed billions from banks (using Tesla shares as collateral) and bought Twitter to reshape the company.

That’s one way to describe a chunk of the “leveraged lending” market, at least. And Moody’s says banks and private debt investors are in a “race to the bottom” to finance leveraged buyouts in private equity.

Why it matters:

Lots of jargon there, but the point is that making such loans is a fast-growing business.

Competition heating up: Private equity buyouts have long been financed by banks, but the $1.5 trillion private credit industry — think less regulated private investment funds, not open to the public, making loans instead of banks — has taken a lot of that business in recent years.

But Moody’s worries the competition over funding buyouts is channeling money into lower and lower-quality deals, stacking debt onto companies right before the economy finally slumps.

• If true, that bodes poorly for the companies getting bought out, the private equity investors buying those companies, and the investors and banks lending them money for the buyouts.

READ MORE!

MORE HEADLINES

?? Why Netflix’s stock surged through the writers strike

?? Peloton shares soar after partnership with Lululemon

?? Why Nike Air Jordans are losing resale value

?? GameStop names Ryan Cohen CEO

?? Pending home sales plunge as mortgage rates sit at 23-year highs

??? Oil Prices Surge To Highest Level In More Than A Year

Oil prices keep on chugging higher. They just reached their highest level in more than a year.

• Meanwhile, U.S. West Texas Intermediate futures — one of the main global oil benchmarks — hit $95.03 per barrel during trading hours in Asia, the highest level since August 2022.

Zoom in: Data from the U.S. Energy Information Administration (EIA) revealed that crude inventories in Cushing, Oklahoma, fell to 22 million barrels, nearing the operational minimum and marking a decrease of 943,000 barrels from the week before.

Should falling oil inventories persist, extracting crude for the market will be "challenging," said a TD Securities managing director.

• He anticipates oil prices will maintain a "high level" throughout the year, with the potential for a further increase if the global oil cartel OPEC+ continues to restrict supply.

Oil deficit: On top of a substantial shortfall this quarter, global oil markets are experiencing a deficit because of production cuts implemented by OPEC and its allies.

• In September, Saudi Arabia, the leading member of OPEC+ (a collection of oil-producing nations that collaborate together), prolonged its voluntary crude oil production cut of 1 million barrels per day until the year's end, keeping the country’s oil output close to 9 million barrels daily.

Why it matters:

The possibility of crude oil hitting $100 a barrel seems realistic, a big shift for a market that had been sluggish.

High gas prices: The surge will impact the price at the pump. As of Thursday, the national average for a gallon of gas was $3.84 and rising.

Global consumption of fossil fuels reached a record high 103 million barrels per?day in June, according to the International Energy Agency, and higher energy prices help no one (except energy companies and their investors.)

• On that point, gas prices represent 6% of the Consumer Price Index, so a surge in the cost to fill up folks’ cars doesn’t help with aggregate inflation levels, either.

READ MORE!

TRIVIA ANSWER

Cambodia, Myanmar, and Laos host some of the world’s smallest stock exchanges by market capitalization, with tiny islands like Malta, Cyprus, and Bermuda also in contention.

SEE YOU NEXT TIME!

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