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Sophisticated financiers often turn to derivatives when they want to accumulate a large position in a stock without the market getting wind of what they're doing. The Securities and Exchange Commission would love that practice to stop.

Why it matters: Rich investors love being able to operate in stealth mode, and they have a lot of lobbying clout. The final outcome of this fight will reveal a lot about how much power SEC chair Gary Gensler really has. 

Driving the news: A key point of contention in the fight between Texas energy utility NRG and activist hedge fund Elliott Associates is the way in which Elliott amassed a 13% stake in NRG by buying derivatives, including total return swaps, that it didn't need to disclose.

The SEC wants to ban such shenanigans, in what Gensler calls "another step toward increasing transparency in this previously opaque market." (Although they're derivatives and not securities, securities-based swaps are regulated by the SEC, not the CFTC.)

Already, the SEC has cut in half, from 10 days to 5 days, the deadline for activist investors to disclose a stake of more than 5% in a company. So long as there's a derivatives workaround, however, that change will have little real effect. 

Between the lines: Gensler points to a series of financial-market fiascos based around these derivatives, including AIG, Archegos, and LTCM, and says it's incumbent upon him to reduce the risk they pose to the markets.  

The other side: Elliott makes the case in its 86-page comment letter to the SEC that "activism plays a critical role in the health of the U.S. capital markets" and that, essentially, the derivatives loophole is the last best hope we have that activists will enable price discovery and improved corporate performance.

Without it, they say, activists wouldn't be able to build a large enough position without the rest of the market being able to find out what they were doing and front-run their trades. 

Our thought bubble: Axios' Michael Flaherty says the sheer weight of the financial industry's lobbying efforts against the proposed rule makes the chances of it passing extremely slim. 

If that's true, then we'll continue with the current slightly incoherent system, whereby rules enforced in the cash market are easily circumvented in the swaps market. 

The SEC vs. stealth activists

The final outcome will reveal a lot about how much power the SEC chair really has.

Illustration of the SEC logo with a hand in front making a "shushing" hand motion.

Shareholder activism

Stock market

Top stories & latest news on the Federal Reserve, real-time data, plus the biggest shifts happening in the U.S. and global economy.

Economy

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Data: Federal Reserve; Chart: Axios Visuals 

The share of American households that own stock either in mutual funds, retirement accounts or as individual shares hit a new high in 2022. 

Why it matters: The relatively large share of households with a stake in the stock market is a distinctive feature of American capitalism, setting it apart from other large advanced nations like the U.K., France, Germany and Canada, where equity market participation is much lower. 

By the numbers: The Federal Reserve's just-published triennial Survey of Consumer Finances — perhaps the most authoritative look at the financial health of American households — shows that in 2022, about 58% of American households owned stock, either directly or indirectly through mutual funds and other investment accounts.  

That's the highest on record, trouncing the previous high water mark of 53% seen during the dot-com boom and right before the Global Financial Crisis. 

Details: The rise in those who own stock directly — that is, by buying individual shares rather than through mutual funds — was a big driver. 

Direct ownership of stocks increased "markedly" between 2019 and 2022, jumping from 15% to 21% — making it the largest change on record, the Fed said in its report. 

That's the highest level of direct ownership of stocks since the early 2000s when it was also 21%.  

💭 Matt's thought bubble: This reflects COVID-related changes in behavior among Americans, many of whom first turned to the stock market as a way of scratching a sports gambling itch during the early phase of the pandemic. 

Smartphone-based apps such as Robinhood aimed at younger traders helped build the habit. 

Surging retail stock buying famously became a cultural phenomenon in January 2021, when coordinated retail investors helped drive the share price of GameStop into the stratosphere.   

The bottom line: The Fed's data, which was collected during 2022, suggests COVID-era trends in retail stock ownership could stick.

the stock market as a way of scratching a sports gambling itch

A record share of U.S. households now own stocks

It's a COVID-era trend that appears to have stuck.

Remember the hype about luxury pre-owned watches as an asset class? Turns out, they couldn't survive a rate-hike cycle.

What's happening: Since March 2022, the WatchCharts Overall Market Index has fallen more than 35%. 

The once-hyped luxury watch market has collapsed

Luxury goods

Profits of select global agriculture companies

Data: United Nations; Chart: Tory Lysik/Axios Visuals

We're in a major hunger crisis — and private corporations are reaping the benefit. 

Why it matters: The largest food-trading companies have the status of oligopolies and have become "unregulated financial institutions," according to a blistering 29-page chapter of the 2023 UNCTAD trade and development report, entitled "Food Commodities, Corporate Profiteering and Crises."

"The profits of four major food traders rise during periods of market volatility and during crises," note the authors. 

The bottom line: More than 345 million people are facing high levels of food insecurity this year. That's a rise of 200 million people from where we were pre-pandemic. Private companies can't necessarily solve that problem — but their unprecedented profits do seem rather distasteful, all the same.

Food companies reap record profits amid hunger crisis

As global food insecurity has risen, so have profits at the biggest food-trading companies.

Food security

Crude oil and super-safe, short-term cashlike investments were your best bets in the third quarter — while long-term bonds got beaten up pretty good. 

The big picture: The story behind the numbers is the as-yet-unfinished battle between the Federal Reserve and inflation.

Context: A sharp uptick in crude oil prices over the last few months — driven by production cutbacks by OPEC+ pals Saudi Arabia and Russia — has reinvigorated inflation pressures. 

It's also rewarded investors who bet on rising oil prices.

The S&P 500 energy sector was up about 14% in Q3, the only industry component of the benchmark index that saw a gain. 

And the U.K.'s commodity-heavy FTSE-100 also fared decently. 

Where it stands: Outside of energy, the pain in stocks was pretty broad-based — including a sharp downturn for both the tech-heavy Nasdaq and Russell 2000 index of small-cap stocks that tend to be sensitive to short-term expectations for the U.S. economy.  

Yes, but: The weakness in Q3 doesn't spell disaster for full-year returns given how well the markets performed earlier this year. 

The Nasdaq is still up 26% this year and the S&P 500 remains in positive territory, up 12%.

The best investments of Q3? Crude oil and cash.

After clawing to within 5% of a new record high, much of the S&P 500's 2023 gains have melted away over the last few months.

Why it matters: Touching a new high is the traditional confirmation that stocks are officially in a new bull market.

Context: The market staged a remarkable rally after it bottomed almost a year ago, on Oct. 12. 

Stocks started to rise as inflation reports showed a welcome slowdown in price increases.  

Falling inflation led to a tumble in long-term interest rates, as investors bet the Fed might ease its tough monetary policy. (Lower long-term interest rates tend to boost the stock market.)

By the numbers: The S&P 500 soared nearly 30% between October and July. 

The tech-heavy Nasdaq jumped nearly 40%. 

That led some the declare that happy days were here again and that a new bull market had begun. (Your humble Axios scribe was reluctant to agree.)  

Yes, but: That was then. Since the end of June, inflation — like Monty Python's proverbial plague victim — has shown it isn't quite dead yet.  

Oil prices have jumped — thanks to Saudi Arabia and Russia cutting production. 

Home prices have resumed their upward climb. 

And the economy has stayed pretty strong, causing many to re-think their views that a near-term recession would eventually lead to rate cuts.

The impact: Long-term interest rates are now the highest in 16 years — and stocks don't like it. 

With one trading day remaining, the S&P has shed more than 4.6%, this month, in its second straight monthly decline. It was its worst month of the year.  

The benchmark index, which in late July was up nearly 20% for the year, is now looking at gains of just 12%. 

The bottom line: The "new bull market" may just be a bear market rally.  

as inflation reports showed a welcome slowdown prices

September stock slump shows bear market’s staying power

Much of the year's gains have melted away.

Stock market news

Change in the S&P 500 index

Investors are coming around to the idea that high-interest rates will stick around for longer than they previously thought — which helps explain the stock market's recent reversal. 

Why it matters: As we've written about a ton over the past two years, rates play a huge, but often unseen role in determining stock market prices.  

Long story short, when rates rise, they pull down the value of stocks in lots of investor models. 

High rates make risk-free assets like Treasuries look a lot more attractive, relative to stocks — and that lures money out of the stock market. 

What they're saying: "US equities [are] unlikely to reach new highs" any time soon, wrote JP Morgan analysts in a note last week, summarizing the common views expressed at a recent investment conference. They cited the increasing investor interest in "cash and high-yielding, high-quality short duration fixed income." 

And BofA Global analysts, noting the large flow of money into short-term, cash-like investments, described investors as "cautious" and willing to be "paid to wait" in cash until the market decides its next move.

State of play: The Federal Reserve last week threw cold water on investor hopes that it'll cut rates any time soon. 

In response, 10-year Treasury note yields jumped to a new 16-year high of nearly 4.50%.

And as you might expect, the S&P suffered. The blue-chip index tumbled 2.9% in its worst week since the failure of Silicon Valley Bank.

With one week left in September, the index is on track for its worst month of the year. 

Zoom out: This year's once robust rally — which lots of people were saying had all the earmarks of a new bull market — has really lost momentum. 

The S&P's yearly gains, which were flirting with 20% back in early August, are now down to 12.5%. 

💭 Our thought bubble: If stocks keep stalling (or falling) investors may avail themselves of other attractive places to stash cash, while they wait for a good reason to take stock market risk.

The bottom line: As markets adjust to high rates, no one seems very confident in where the stock market goes from here.  

Investors are starting to accept a new reality of higher rates, lower stocks

Illustration of a stock trend line being pulled down by a heavy, metal percentage symbol

"Dumb Money" is an enjoyable and funny David-versus-Goliath film set in the midst of a global pandemic. 

Why it matters: The movie has the misfortune of being released in the middle of an actors strike, thereby depriving it of a publicity tour from the likes of Seth Rogen, America Ferrera, and Pete Davidson. You should still go see it. 

The big picture: The movie unabashedly takes the side of the little guy and Wall Street Bets. 

It paints hedge fund managers like Gabe Plotkin and Steve Cohen not only as the meme-stock losers whose money created the gains for the Extremely Online masses, but also as individuals whose outsize wealth came from immiserating those regular folk in the first place. 

Wall Street Bets in particular, the Reddit message board, is portrayed as a revolutionary force, led in large part by Keith "Roaring Kitty" Gill. 

"The movement he started is only the beginning," concludes the film. 

Between the lines: Robinhood CEO Vlad Tenev emerges as arguably the movie's biggest villain; Gill its biggest hero. 

The intrigue: Ken Griffin, of Citadel Securities, is a relatively minor character, albeit clearly on the side of the bad guys. He hired a few pricey attack dog attorneys to try to polish up the portrayal. 

The bottom line: Real finance is not the simple morality tale that the film makes it out to be. But don't let that prevent you from enjoying the movie.

"Dumb money:" A meme stock morality tale

An enjoyable and funny David-versus-Goliath story in the midst of a global pandemic.

Ken Griffin and Gabe Plotkin, as played by Nick Offerman and Seth Rogen, in "Dumb Money." Photo: Lacey Terrell / Sony Pictures

GameStop

The Fed didn't touch rates Wednesday. And stocks still didn't like it. 

Why it matters: The share slide suggests that year's market rally may be based in part on unrealistic expectations that the Fed will quickly flip toward cutting rates if the economy continues to look like it could pull off a soft landing.

State of play: As expected, on Wednesday at 2pm ET, the Fed announced it was leaving its policy rate in place at 5.25%-5.5%. 

But the market started to go downhill once Fed chair Jerome Powell got behind the podium for the post-announcement news conference at 2:30. 

The S&P 500 ended the day down 0.9%. The interest rate-sensitive Nasdaq dropped 1.5%.

Zoom in: Powell maintained a pretty effective poker face through much of the meeting, fending off efforts to pin him down on what the Fed would do next. 

Yes, but: Seasoned observers noted that, with inflation still high, he didn't sound especially eager to explore the idea of cutting rates.    

"We're prepared to raise rates further if appropriate and we intend to hold policy at a restrictive level until we're confident that inflation is moving down sustainably," Powell said, in one of the comments that market analysts focused on. 

The bottom line: Wednesday seemed to convince more investors there's little sign of rate cuts any time soon. 

Stocks sell off after Powell crushes rate-cut hopes

Stocks sold off after the Fed chair crushed those hopes.

Interest rates

Federal Reserve

Global debt as a share of global GDP, by type

The world's debt-to-GDP ratio ticked down in 2022 — largely thanks to the impact of inflation, which reduced the real value of debt as economic activity remained strong, according to the International Monetary Fund's 2023 Global Debt Monitor, unveiled last week. 

The big picture: However, the IMF's economists see debt levels returning to the pre-pandemic growth trend — and some are starting to contemplate the political and market limitations of ever-expanding deficits.

By the numbers: Since the global financial crisis, public sector debt — i.e. government debt — has increased by nearly 30 percentage points relative to GDP.

In nine of the 21 major developed economies, it surged by 45 points, said Joyce Chang, JPMorgan's chair of global research, speaking at an IMF event launching the latest debt report.

Why it matters: With interest costs ballooning, the discussion among global finance types is turning to the debt sustainability of advanced economies — not just that of frontier countries. The market's tolerance for deficit growth may eventually hit a wall, just as governments seek to fund a host of critical issues that will define the next decade.

For example, climate spending needs are massive. Military spending needs may grow, given challenges from China. 

"And then, of course, there is inequality that's looming in all countries, and you need to have social spending to support the very poorest," Martin Mühleisen, a senior fellow at the Atlantic Council, tells Axios.

At the event, Jeromin Zettelmeyer, director at policy research firm Bruegel and a former IMF deputy director, said, "My worry is that the main casualty of [rising deficits] is going to be the fight against climate change — where we are seeing some political cracks, even in Europe." 

Zoom out: Conflicts around how to manage (or bring down) debt levels can tear societies apart, and open up room for populism and divisiveness, Zettelmeyer added.

The key question: "Given the increased ambitions concerning the role of government that appeared in the pandemic ... How can governments finance all [these priorities] in a way which is compatible with financial stability in particular, and macroeconomic stability in general?" Vitor Gaspar, director in the IMF fiscal affairs department, said at the event.

Rising deficits draw attention as government spending needs pile up

"My worry is that the main casualty is going to be the fight against climate change."

Debt

Closer

Axios Closer

First, it was electronics — then it was cars — and now it's AI: The semiconductor chip is entering a new stratospheric phase.

Why it matters: Pandemic-era supply chain breakdowns and national security concerns cast a spotlight on the need for more chip capacity and, in particular, more domestic production.

Driving the news: After the bell Wednesday, chip giant Nvidia projected revenue of $11 billion for its fiscal second-quarter running through July, astonishing analysts and investors and driving the company's stock up more than 22% today.

Bank of America analyst Vivek Arya called it "remarkable" and said it was $4 billion more than the consensus among analysts.

Wedbush Securities analyst Dan Ives described it as a "jaw dropping" outlook and said it "shows the historical demand for AI happening now in the enterprise and consumer landscape."

And Morgan Stanley analyst Joe Moore noted that Nvidia has historically been conservative about projecting revenue during growth times.

Quick take: If you thought the boom in demand for smartphone, automotive and crypto processing power was big, wait until you see this.

Companies are scrambling to order chips to fuel their generative AI ambitions after Open AI's release of ChatGPT set Wall Street abuzz.

And that means nothing but good things for Nvidia.

What they're saying: Competition is booming, but "we envision Nvidia maintaining its status as the industry standard for the foreseeable future given its competitive moat and the urgency with which customers are developing/deploying increasingly complex AI models," Goldman Sachs analyst Toshiya Hari wrote Thursday in a research note.

The intrigue: The AI chip boom isn't exactly new: Nvidia saw it coming a long time ago. 

“The age of AI is in full throttle," Nvidia CEO Jensen Huang was quoted as saying in 2020.

The big question: Will the chips be made in the U.S.?

Only 12% of semiconductor chips overall were made in the U.S. in 2022, down from 37% in 1990, according to the Semiconductor Industry Association.

In 2022, President Joe Biden signed into law the bipartisan CHIPS and Science Act, incentivizing companies to make chips here — and that's what's happening with investments from companies like Intel, Samsung and Taiwan Semiconductor Manufacturing Company, the latter of which manufactures the advanced AI chips that Nvidia designs and sells.

The White House noted at the time that chips are needed to "keep the United States the leader in the industries of tomorrow, including ... artificial intelligence."

But skeptics say the demand for chips will be so extraordinary that it will difficult for U.S.-based efforts to expand quickly enough.

The bottom line: The AI future depends on the speed with which chips can be developed, advanced and manufactured — and companies that are already doing it have a huge leg up.

AI future depends on semiconductor chips from companies like Nvidia

Illustration of a computer chip on an abstract background of circuitry patterns. 

Artificial intelligence

Macro

Axios Macro

Trouble in the commercial real estate sector — including office buildings across the country that stand largely unoccupied — is a possible risk to the U.S. financial system, according to the Federal Reserve’s latest Financial Stability report released on Monday.

Why it matters: A huge shift in where white-collar staff decides to work is rippling through the commercial real estate market, with warnings that sharp drops in property valuations will follow as office space demand slumps.

That could spell trouble for the already battered financial sector, with uncertainty about the ultimate effect on the economy

What they're saying: "[T]he magnitude of a correction in property values could be sizable and therefore lead to credit losses" for holders of commercial real estate debt, officials write in the "Financial Stability Report."

The Fed also said that the sharp jump in borrowing costs over the past year increases the risk that commercial mortgage borrowers won't be able to refinance their loans as they come due.

The intrigue: Worries about the sector prompted officials to more closely monitor the performance of commercial real estate loans, a disclosure made public in the report — which, unlike the last report, features a special section on commercial real estate-related risks.

The Fed's bank supervisors — those charged with day-to-day oversight of lenders — also have "expanded examination procedures" for banks with "significant" exposure to commercial real estate.

Details: Mortgages for non-farm, non-residential commercial real estate — which includes offices — are a small slice of total assets held by banks, according to the Fed. But those mortgages represent one-fifth of total assets for the smallest banks (with some of those firms, of course, having more exposure than others).

But the Fed also acknowledges something of a blind spot on assessing the health of the market: Banks hold roughly 60% of these loans, but there's limited information on how the loans held by other entities (besides banks) are performing, the report said.

What to watch: The Fed's quarterly survey of loan officers, released yesterday, suggests that banks are more wary than they have been in years about extending credit for commercial real estate projects — a shift that has accelerated since early 2022.

Loan standards are now nearly the tightest since at least the 2008 global financial crisis — outmatched only during the onset of the pandemic.

Demand for these loans, meanwhile, has collapsed: the share of banks reporting stronger demand fell to the lowest on record. 

The bottom line: In a survey that accompanied the Fed's stability report, commercial real estate was mentioned by some market participants as a "possible trigger for systemic risk" — making the list of top-cited concerns, alongside inflation, banking sector stress and the debt limit. 

Why the Federal Reserve is watching commercial real estate

Worries about the sector prompted Fed officials to more closely monitor the performance of commercial real estate loans.

Illustration of a shaking eyes emoji rising from behind a cubicle wall.

Real estate

Stocks are closing in on their highs for the year as the S&P 500 recovers ground lost amid the Silicon Valley Bank bust. 

By the numbers: The S&P 500 closed Tuesday up 8.2% since we put the awful year of '22 in the rearview. 

The S&P was down 19.4% last year. (Let us never speak of it again.)  

Between the lines: It's mostly the same old story, with this year's drop in longer-term interest rates goosing the kind of tech stocks that benefit from falling rates. 

The yield on the 10-year Treasury note is down to about 3.6%, from over 4% in early March.

The impact: The tech-heavy Nasdaq composite is up 16% so far in 2023. 

The "communications services" sector — a category that includes Meta and Alphabet — is the best performing of the S&P 500's 11 sectors, up more than 20%. 

The other side: Financials — down 2.6% — are the worst performing part of the market, which is no surprise given the stress they saw during the Silicon Valley Bank collapse.

First Republic, the troubled San Francisco lender that was caught in the SVB downdraft, has seen its shares decline about 90% in 2023.  

Stocks are approaching their 2023 highs

This year's drop in longer-term interest rates goosed tech stocks that benefit from falling rates.

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