Jun 9, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙“[S]uffering has been stronger than all other teaching, and has taught me to understand what your heart used to be. I have been bent and broken, but — I hope — into a better shape.” - See who said it and why it matters at the bottom.

1 big thing: Sports bettors and retail traders are leading the market

Illustration: Aïda Amer/Axios

Axios' Kendall Baker and I write: Professional investors have largely abandoned the stock market since the coronavirus pandemic sent U.S. stocks to the fastest bear market in history — but a massive group of sports bettors, bored millennials and hungry new investors have jumped into retail trading with both feet.

  • They may be a driving force pushing U.S. stocks to their recent highs and potentially driving them further.

What's happening: Online brokerages have seen a record number of new accounts opened this year, and the big four — E-Trade, TD Ameritrade, Charles Schwab and Interactive Brokers — executed as many trades in March and April as in the whole first half of last year, per public disclosures.

  • Equity strategists at Deutsche Bank note there is "plenty of evidence" that new retail investors have been buying since the stock market began to crash and that professional money managers are "now chasing" them.

Meanwhile, most professional investors were sitting on the sidelines.

  • Nearly $5 trillion now sits in money market funds, which are effectively savings accounts, the largest total on record and about $1 trillion more than the record high during the global financial crisis.
  • In its note to clients, Deutsche strategists add that for "large swathes of the equity market in the US as well as globally ... positioning is still extremely low."

Between the lines: Robinhood, whose easy-to-use app makes the transition between sports betting and trading seamless, boasts a similar customer base to most sportsbooks, notes Marc Rubinstein in his newsletter, Net Interest.

  • "43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that's the same group that has flocked to Robinhood," Rubinstein writes.

The big picture: Sports betting and stock trading aren't all that different. In fact, most online betting platforms are modeled on stock exchanges, and Nasdaq itself provides sportsbooks with technology that was born in the financial markets.

Reality check: Institutional investors have still not joined the party, buying bonds rather than stocks as U.S. equity indexes raced back from their lows over the last two months.

  • Data from the Investment Company Institute show equity funds saw six straight weeks of outflows from the week ending April 22 to the week ending May 27, totaling $78.2 billion.
  • Bond funds, on the other hand, have had seven straight weeks of inflows through May 27, totaling $91.7 billion.

Where it stands: Professional traders have finally started dipping their toes back into the stock market this month, according to Bank of America's data, which showed $6.2 billion into stocks last week, compared with $32.5 billion into bonds.

  • BofA's Bull & Bear indicator rose from its lowest possible level — 0.0 — where it had been since March 25 to move to 0.4 last week, still indicating a paucity of institutional investors buying stocks.
2. Catch up quick

The U.S. economy is officially in recession, the National Bureau of Economic Research said Monday, citing the "unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy." (CNBC)

BP plans to cut its global workforce by 10,000 jobs, or 14%, with most of the reduction occurring by year's end, the company announced yesterday. (Axios)

COVID-19 appears to be in retreat in former hotspots like New York and New Jersey, but is persisting and in some cases spreading aggressively in parts of the South, Midwest and West. (Washington Post)

3. Fighting racism through investment
Screenshot of a table from Cornerstone Capital Group showing ways investors can help reduce the racial wealth gap in different investment classes

It doesn't take a $100 million SoftBank fund or a $1 billion Bank of America initiative to help increase racial equality in the United States.

  • There is much that concerned investors can do to help curtail the racial wealth gap and general systemic racial inequality that is at the heart of the protests currently happening in the U.S. and around the world.

What they're saying: Cornerstone Capital Group, an investment adviser focusing on socially conscious investing, wrote a white paper in 2018 detailing investment changes portfolio managers and investors could make to help reduce the racial wealth gap (see above).

  • "Wealth inequality among racial and ethnic groups in the United States results from structural racism dating to the beginning of the republic," Cornerstone said in the paper.
  • "Investors can contribute to the narrowing of economic disparities through a dedicated emphasis on investing in underserved minority communities."

Beyond impact investing, there are major steps to be taken in corporate America, according to Anthony Coley, a former U.S. Treasury official and senior executive at Managed Funds Association, who is now the founder of Corner Office Strategies.

  • "Collectively and individually, corporate America must commit to reverse the legacy of systemic discrimination," Coley writes in a commentary for Barron's.
  • "Giving money to frontline organizations is good (and necessary) but it is not nearly enough. Real change requires us to rethink the role of business in a free market economy. Take a look at what the Business Roundtable is doing in this area."

Go deeper: Your LinkedIn post is not enough. Here’s what business leaders need to do about racism (Barron's)

4. More businesses lost in last 3 months than all of Great Recession

Data: National Bureau of Economic Research; Table: Axios Visuals

The U.S. saw its largest ever decline in the number of business owners between February and April, as at least 3.3 million shut their doors, a new paper from the National Bureau of Economic Research using the Census Bureau's Current Population Survey found.

What it means: The record wave of closures was widespread but disproportionately hit minority- and immigrant-owned firms, and "may portend longer-term ramifications for job losses and economic inequality," the study found.

  • African American businesses were the hardest hit.

The big picture: "No other one-, two- or even 12-month window of time has ever shown such a large change in business activity," author Robert W. Fairlie writes.

  • "For comparison, from the start to end of the Great Recession the number of business owners decreased by 730,000 representing only a 5 percent reduction."
  • The reduction from February to April this year is more than four times that much.

What's next: "More permanent mass closures of small businesses in the United States are likely to have a dramatic effect on employee job losses, further income inequality, and contribute to a prolonged recession."

5. The Fed to take on more risk

The Fed expanded yet another of its special purpose vehicles Monday, increasing eligibility for its Main Street Lending Program and raising the percentage of the loans that it will take on to 95%.

What it means: The Main Street program is the Fed's attempt to get money directly to more American businesses that have been left out of the Paycheck Protection Program and other CARES Act initiatives.

  • The Fed lowered the minimum loan amount to $250,000, opening the vehicle to smaller companies than before, and also raised the maximum loan limit.
  • The Fed also lengthened the repayment schedule so that borrowers don't need to begin paying back the loan's principal for two years, and extended the term to five years.

Why it matters: These changes are likely to increase the number of borrowers able to participate in the program.

  • It could also invite significant moral hazard for both the banks that are assigned to approve the loans (but will now only be on the hook for 5% of the loan amount) and the companies applying for them.
  • It also makes it more likely the Fed will loan out money that will not be paid back, violating a central tenet of the Federal Reserve Act.

What we're hearing: "The Fed simply views the risks that they are taking as commensurate with the true needs of Main Street," Joe Brusuelas, chief economist at tax and consulting firm RSM, tells Axios.

  • Both the Treasury Department and the Fed "are signaling to the public that the risks around the economic outlook are sufficient to push aside notions of moral hazard to avoid long-term damage to the real economy."

Watch this space: The Main Street vehicle has become contentious on Capitol Hill because it is expected to be accessed by oil and gas companies that have been offered no other lifelines from Congress.

  • Many are heavily indebted and have low credit ratings, but are likely to hold significant sway among bankers, especially in oil-rich states.
  • Treasury and the Fed will be taking on almost all of the risk for the loans, but the banks will be making the decisions on who is approved.
Dion Rabouin

Thanks for reading!

Quote: "[S]uffering has been stronger than all other teaching, and has taught me to understand what your heart used to be. I have been bent and broken, but — I hope — into a better shape.”

Why it matters: On June 9, 1870, illustrious author Charles Dickens died. Estella says the quote above to Pip in Dickens' 1861 novel “Great Expectations.”

  • "But you said to me," returned Estella, very earnestly, "'God bless you, God forgive you!' And if you could say that to me then, you will not hesitate to say that to me now, — now, when suffering has been stronger than all other teaching, and has taught me to understand what your heart used to be. I have been bent and broken, but — I hope — into a better shape. Be as considerate and good to me as you were, and tell me we are friends."