Axios Markets

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July 10, 2019

🚨 Coming this Wednesday (that's today!), we're launching Axios Cities, a new once-weekly newsletter from the big homie Kim Hart.

  • Expect news and analysis of the technological and demographic trends shaping cities, the economic engines of the world
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Situational awareness:

  • Henry Ross Perot was a business-savvy entrepreneur who made $2.5 billion in 1984 when he sold the company he founded, Electronic Data Systems, to General Motors. He twice ran for president and became a household name thanks to his signature twang and matter-of-fact sensibilities. He died at his home in Dallas on Tuesday at the age of 89.
  • Fed Chair Jerome Powell begins two days of Congressional testimony this morning. (CNBC)

1 big thing: Missing the rally

Illustration of a hook hovering over money.
Illustration: Rebecca Zisser/Axios

The U.S. stock market is up almost 20% this year, but investors have missed out on much of the rally in stocks: They've sold equities and piled into bonds and money market funds — effectively low-yield savings accounts — largely out of fear.

What's happening: Institutional money managers and retail investors around the world have pulled a net $140.6 billion out of equity funds in 2019, according to data from Lipper, which tracks $49.1 trillion of assets.

  • The "Twilight Zone" environment, in which equity prices have risen despite net selling of stocks by investors, is taking place all over the world.
  • Investors have bought bonds — a net $255.5 billion so far this year — even though more than $13 trillion of bonds currently hold negative yields, meaning investors lose money by holding them.

What it means: "People don't trust the stock market," Emily Roland, head of capital markets research at John Hancock Investment Management, tells Axios. "I'm more concerned about that than I am about the FOMO trade."

  • "We're seeing everybody embrace safety, which is fine, but from a long-term investing diversification standpoint, it doesn't end up working in your favor."

Details: Lipper's data shows a strong investor preference for safety, as investment grade and short-term government bonds have seen significant inflows, while risky high-yield — or junk — bonds have seen far less.

The returns have been just the opposite of the flows. MSCI's index of equity markets around the globe has risen 16.7% year to date, and MSCI's U.S. index is up 18.9%. High-yield bonds have delivered 9.5% returns for investors, according to Lipper, compared to investment grade bond funds, which have seen 6.2% return.

  • Safe short-dated government bond funds have returned 2.4%, year-to-date, data shows.
  • Investors also have invested a net $148.6 billion into money market funds that collectively yielded less than 1% this year.

Between the lines: "This has been a very unloved bull market by investors,” Roland says. "That's another reason, though, maybe it has some legs left."

What's next? The second half of the year looks to present many of the same potential risks and possible upside as the first.

Go deeper: Global economic whiplash

2. Another recession alarm goes off

Reproduced from Federal Reserve Bank of New York; Chart: Axios Visuals
Reproduced from Federal Reserve Bank of New York; Chart: Axios Visuals

Worriers have had good reasons to fret about the economic recovery.

In addition to being the longest economic expansion in U.S. history, a number of reliable recession warning indicators have been flashing in 2019. The latest is the New York Fed's recession probability index.

What they're saying: "In the past, every time since 1960 that this index has breached 30%, a recession followed," Morgan Stanley Wealth Management CIO Lisa Shalett wrote in a July 1 note to clients. It rose to 32.9% in June.

  • Shalett also pointed to the gold/silver ratio, weakness in auto sales, housing, manufacturing, earnings and capital spending.
  • "Recession probability models have entered warning territory and it may be unavoidable."

3. Mexican peso falls hard after finance minister quits

Data:; Chart: Axios Visuals
Data:; Chart: Axios Visuals

The Mexican peso fell as much as 1.3%, the biggest drop in 4 weeks, against the U.S. dollar on Tuesday after Mexican Finance Minister Carlos Urzúa resigned unexpectedly.

What happened: Urzúa sent a letter to Mexican President Andrés Manuel López Obrador (AMLO), in which he suggested members of the president's inner circle with "patent conflict of interest" had meddled in policy and that decisions had been made without "sufficient foundation."

Why it matters: AMLO had worried investors as a candidate with his fiery rhetoric and hard-left policy prescriptions. But his choice of Urzúa, along with other more mainstream officials, for his cabinet had helped soothe market angst.

  • In his letter, Urzúa said "all economic policy should be based on evidence ... free of all extremism, be it right or left." During his time in the administration he said that philosophy did not "find echo" in López Obrador's government.
  • News of Urzúa's successor, undersecretary of finance and public credit Arturo Herrera Gutierrez, calmed markets slightly, trimming the peso's losses for the day.

4. Chewy is latest stock analysts love but can't afford

Data:; Chart: Axios Visuals
Data:; Chart: Axios Visuals

Chewy was the latest stock to become a victim of its own success. In a familiar pattern for companies that have seen share prices skyrocket after their debut in public markets, a slew of analysts released largely upbeat ratings of the company, but warned that the stock may already be in overbought territory.

What happened: Shares of Chewy fell 4% on Tuesday after at least 7 analysts issued guidance, with 5 placing the equivalent of Hold ratings on the stock and just 2 recommending investors buy it, FactSet data shows.

  • Chewy went public less than a month ago, and is now 4.5% below the $34.99 closing price on its first day of trading.

Yes, but: The stock is still 50% higher than its $22 IPO price.

5. How Tom Steyer made his money

A photo of Tom Steyer.
Tom Steyer. Photo: Steve Pope/Getty Images

Axios' Felix Salmon writes: Tom Steyer, who launched his presidential campaign Tuesday, was early to the hedge fund game and eventually became a billionaire. He founded Farallon Capital in 1986 and left Farallon at the end of 2013,

In general, there are two ways to become a billionaire hedge fund manager.

  • The first is to be a pirate — raid the Bank of England, bet on a housing collapse, that kind of thing. The returns on those bets can be so enormous that you can make billions even off a relatively small asset base.
  • Tom Steyer was the other kind of hedge fund billionaire. He's much quieter, and he doesn't make big audacious bets. But he was able to promise conservative institutional investors predictably good returns, in both bull markets and bear markets. That helped him amass a huge asset base. Good returns on $30 billion of assets will ultimately make you just as rich as spectacular returns on $3 billion of assets.

The bottom line: One of Steyer's greatest successes is that Farallon is still a top-20 hedge fund 6 years later. Steyer wasn't some lightning-in-a-bottle individual genius. Rather, he managed to build an institution that would outlast him.