Dec 12, 2018

Axios Markets

By Dion Rabouin
Dion Rabouin

🚨💰📈Jazzed to share a special beta version of Axios Markets, a daily newsletter we'll be launching Jan. 7 to cover all the important stories in markets, business and finance.

  • Dion Rabouin will be our new markets editor, joining reporter Courtenay Brown and the writers of our other two business newsletters: Felix Salmon with the weekly Axios Edge and Dan Primack with his daily deals newsletter Axios Pro Rata.
  • The plan: There will be two more weekly editions of Axios Markets — Dec. 19 will have the latest on the Fed's rate decision and Jan. 2 will bring a 2019 markets lookahead. But only this one goes to my Axios AM subscribers. To get future editions sign up here.

Thanks for joining us on this journey. Send me feedback by hitting reply to this email or by writing mike@axios.com. And you can reach Dion and Courtenay at dion.rabouin@axios.com and courtenay.brown@axios.com.

1 big thing: Stop worrying about the next recession

Illustration: Aïda Amer/Axios

One of the biggest risks to the stock market is the fear of a recession, much more so than a recession itself, Felix and Courtenay write.

  • Will there be a recession? Yes, but it's almost certainly not going to be another catastrophic financial crisis, like 2008. It could be very mild.
  • When will the recession arrive? No one has a clue, and if history is any guide, there will be debate even while we’re already in it about whether there will be one.
  • What will a recession mean in practice? Recessions are generally bad for employment, but the jobs situation could deteriorate even without a recession. The market is not a snapshot of the economy, and can easily rise during a recession.

There are warning signs of an economic slowdown, but there's a strong case that a recession could still be several years away.

  • We're not about to collapse under a pile of debt. Household finances are still healthy. Household outstanding debt is about 79% of GDP. It was 125% at its 2009 peak. And while corporate debt has gotten a bit excessive, BlackRock says that debt levels are still manageable.
  • A large crash like in 2000 could hurt, but a simple bear market, with valuations down 20% from their high, would have relatively little effect on the economy.
  • Interest rate hikes have become less of a risk. Fed chairman Jerome Powell has already dialed back his plans for rate hikes in 2019, saying any such hikes will only arrive in response to new data about economic strength. Interest rates are not yet so high as to cause a recession.
  • Hundreds of thousands of long-term unemployed have re-entered the labor force, often at companies where they learn transferable skills, Axios Future editor Steve LeVine noted yesterday. That may juice the entire economy, creating the conditions for higher GDP growth and "a persistent, positive macroeconomic effect," says Jason Furman, former chief economist to President Obama and now a professor at Harvard.

The bottom line: We have nothing to fear but fear itself.

Go deeper: The Axios AM Deep Dive on "Why we're safer" 10 years after the financial crisis.

2. Big Tech's hold on the market might not last
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Data: S&P Dow Jones Indices; Note: 2018 numbers are as of market close on Dec. 7, 2018; Chart: Naema Ahmed/Axios

The 4 biggest companies in the S&P 500 are tech companies, and even if you go back to the height of the dot-com bubble in 1999, you won't see this degree of tech dominance in the index, Courtenay writes.

Microsoft, Apple, Amazon and Alphabet are the biggest companies in the S&P 500. Add in Facebook (number 6 on the list, right behind Berkshire Hathaway), and the 5 tech giants — just 1% of the companies in the index — account for 14.7% of its total capitalization.

Why it matters: The companies that have become central to our lives and our politics are now also central to our markets.

  • Information technology (like Apple and Microsoft) and communication services (such as Facebook, Twitter and Netflix) are the S&P's tech-heavy sectors and they make up 40% of the S&P.

Yes, but: Tech dominance waxes and wanes. In 1985, IBM was by far the biggest company in America, responsible for over 6% of the S&P 500 on its own. By 1992, there were no tech companies in the top 10 at all.

  • Today, the S&P is not beholden to single company risk. No single company makes up more than 4% of the S&P — and hasn't since Exxon in 2008.
  • Instead, the "bigness" is spread across a small group of tech companies, nearly all of which face threats of regulation.

The bottom line: The S&P is not particularly concentrated now; the top 10 companies always account for about 20% of the total capitalization. What's new is the degree to which tech companies rule the S&P 500. If history is any guide, that dominance won't last very long.

3. Measuring Trump's stock market
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Data: FactSet; Chart: Andrew Witherspoon/Axios

Donald Trump famously uses the stock market as a guide to how well his presidency is going. It's up since his election, but it's down sharply from its highs.

  • While Big Tech names led the selloff, the market is still higher than it would be without them.
4. Theresa May faces confidence vote ¯\_(ツ)_/¯

The latest from London. Photo: Amer Ghazzal/Barcroft Media via Getty Images

As this newsletter goes out, Britain's Conservative MPs are voting in secret on whether they have confidence in their leader, Theresa May. The prime minister's failure to hold a vote yesterday on her Brexit plan has revealed her as being, in Norman Lamont's famous phrase, "in office, but not in power."

Be smart: The problem facing the Conservative Party is that defenestrating May solves nothing, Felix writes.

  • The trilemma facing May would face any other prime minister. Parliament is faced with three choices — May's deal, no deal, or no Brexit — and none of them can command a majority of MPs.
  • May has told MPs that she’s going to resign as prime minister and party leader anyway, probably in the next two years.

The bottom line: Whether May survives or not (and the pound rallied because she probably will survive), Britain will be in political chaos at least until January, and quite possibly all the way through to the Brexit date of March 29. Don't expect today's vote to clarify anything beyond the narrow question of May's job security.

Meanwhile, governments in Poland and France are also reportedly facing confidence votes this week.

Bonus: Tweet du jour

Tweet from @csynnott, after Chrissy Teigen asked for help understanding Brexit

5. Biggest media write-downs of the century

Verizon took a $4.6 billion write-down on Oath, its media arm, yesterday. The move comes after Oath subsidiary Yahoo took a $482 million write-down on its Tumblr acquisition, Felix writes.

Between the lines: Multibillion-dollar media write-downs are rare, if only because media companies are almost never acquired for billions of dollars in the first place.

  • That said, in 2009 News Corp wrote down the value of its Dow Jones acquisition by $3 billion.
  • As Peter Kafka explains, large telecommunication companies like Verizon often get the media bug. But when the executives in charge of those acquisitions leave, the promised synergies tend to evaporate.

More such write-downs could be in the cards, in the wake of Comcast's $30 billion acquisition of NBC Universal and AT&T's $85 billion takeover of Time Warner.

  • Remember that the largest media merger of all time, AOL's merger with Time Warner, prompted a $45.5 billion write-down in January 2003, mostly tied to the decreased value of AOL.
  • Verizon's write-down, too, was linked to its $4.4 billion AOL acquisition. There seems to be no limit to how far the value of AOL can fall.

Why it matters: Very few major media acquisitions have worked out well for the buyer. Even so, there's rarely a shortage of executives with media stars in their eyes.

6. Watching the yield curve
Expand chart
Data: FactSet; Chart: Lazaro Gamio/Axios

Ratings agency Fitch this morning writes that the "risk of an imminent U.S. recession remains low despite the recent flattening of the U.S. yield curve."

  • "The underlying recession signals traditionally embodied by a yield curve inversion, namely high policy interest rates relative to long-term expectations of policy rates, and falling bank profitability and credit availability, are
    absent," per Fitch.

You might have missed the huge market rally last week, what with all the political news and stock market noise: The price on the benchmark 10-year Treasury bond rose from 100.22 on Monday morning to 102.12 at the close on Friday, Felix wrote in Axios Edge.

  • That's a massive move in the world of bond investors: It brought the yield on the bond from 3.04% all the way down to 2.85%. (Yields go down when prices go up.)

What's happening: The yield on 10-year notes is falling even as the market expects one more rate hike from the Fed this month. In market jargon, the yield curve is flattening.

  • When long-term yields are lower than short-term yields, that's an "inversion," and like night follows day, whenever you hear the phrase "inverted yield curve," the word "recession" is sure to follow.

The curve has not yet inverted. Small bits of it have inverted, but the yield on the 10-year note is still a tiny bit higher than the yield on 1-year notes, and that's the main indicator that economists look at when they ask whether a recession is coming. Right now we're about 15 basis points away from an inverted yield curve.

  • If an inverted yield curve isn't bad for stocks, it's not bad for the economy either. When long-term rates are lower than short-term rates, that encourages long-term investment, which is a good thing.
  • And while recessions do always arrive eventually, the time between the yield curve first inverting and the recession arriving can be as long as 765 days.

Our thought bubble: The yield curve is not — yet — flashing a recession sign. A recession is not a bear market, and neither does it mean a financial crisis.

7. Situational awareness
  • U.S. consumer prices were flat last month, thanks to a drop in energy prices. "That performance is close to the Federal Reserve's 2 percent target for annual price gains and indicates that inflation remains well-behaved," the Associated Press reports.
  • China is planning to replace its "Made in China 2025" industrial policy with "a new program promising greater access for foreign companies," the WSJ scoops. The prior policy had been "savaged" by the Trump administration.
  • Google CEO Sundar Pichai told Axios yesterday that the newfound skepticism of Big Tech is "here to stay" but doesn’t see any immediate threats to break up the search giant. Still, he acknowledged the need for Menlo Park and Washington to have deeper, more consistent engagement to achieve balance in any potential regulation.
  • Uber has picked Morgan Stanley to lead its IPO, per Bloomberg, in an upset, given that Goldman Sachs was considered a shoo-in for the role before last year's Uber management shakeup. Dan notes maybe it's because Morgan Stanley's Michael Grimes moonlighted as an Uber driver.
  • China’s Tencent Music began trading on the New York Stock Exchange at $14.10, after pricing at $13, the bottom of its IPO range. Shares rose 10%. The listing had been postponed thanks to U.S-China tensions and market volatility.
  • Japan and the EU neared a free-trade deal to "eliminate virtually all tariffs between the two partners," Bloomberg reports. "Trump’s protectionist tilt has given impetus to the EU-Japan accord, which marks the bloc’s second deal with a fellow member of the Group of Seven leading industrial nations following a pact with Canada."
8. 1 doom thing: Style sections prepare for market meltdown

Pictures of traders with hands on their faces are Felix's favorite. Photo: Spencer Platt/Getty Images

Newspaper style sections are now comparing the current moment to 1929 and predicting an imminent market crash.

Here are the top 5 reasons for the end being nigh, per NYT:

5. Student Debt
4. China
3. The End of Easy Money
2. Italexit
1. An Anti-Billionaire Uprising Across America
Dion Rabouin