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Following the fear index on Wall Street

    The US stock market, as measured by the S&P 500, plunged more than 3 percent yesterday, dragging it deeper into bear market territory. This morning, futures markets are suggesting a rebound, but the S&P is still well on track to record its 10th weekly decline in the past 11 weeks.

    Bull markets are often said to climb a wall of worry, with the occasional slip. When bear markets are rapping, there are also periodic pauses to catch your breath. That has been the theme of late, with investors drifting away from the relief that policymakers are taking aggressive measures to curb inflation, fearing the effect those measures could have on economic growth.

    One of the best bets of late is volatility. The VIX volatility index, commonly referred to as the “fear index” because it tracks investor demand for a type of financial instrument that offers protection against market declines, has more than doubled to well above 30 in the past year. second half of last year, the lowest level since the start of the pandemic.

    The reasons for the stock market’s downward swings are well known at this point:

    • A mix of supply chain problems and a hot economy has pushed prices up.

    • To fight inflation, the Fed raise interest aggressive.

    • Investors fear the Fed’s efforts will tilt the economy recession†

    • There is also a trailing pandemicand a war in Europe†

    The stock market itself can also be an economic problem. In all, the decline in stocks this year has wiped out about $12 trillion in value from investors’ portfolios. That’s more than the $8 trillion drop in 2008, during the worst financial crisis in a century, although the drop in 2008 was greater in percentage terms. Over time, the rise and fall of stocks can propel and drag the economy through what economists call the wealth effect: When people feel poorer, even if their losses are mostly on paper, they may not spend as much, which dents the economy. .

    Analysts say the market is unlikely to recover until there are signs that inflation is under control† Lower inflation, in turn, would ease pressure from the Fed and other central banks to raise interest rates quickly, reversing the negative spiral in which the market and economy appear to be trapped.

    For now, investors are betting that volatility is here to stay. Normally when the VIX peaks, bets on where the index will trade a few months in the future are much lower than its current level. That is not the case now. Investors are currently betting that the VIX will end the year at just below 30, only slightly lower than today, and much higher than the long-term trend. The VIX has averaged around 20 for the past five years.

    The January 6 commission hearings target all of the president’s men† A top attorney for former Vice President Mike Pence said Donald Trump and attorney John Eastman were told Trump’s plan to undo the 2020 election was illegal. In another twist, YouTube removed a portion of the hearing uploaded by the Jan. 6 commission that focused on lies Donald Trump was spreading, saying the commission was spreading misinformation.

    Russia is putting economic pressure on European leaders in Ukraine. While the heads of state of Germany, France and Italy met with Ukraine’s President Volodymyr Zelensky, Russia cut flows to Europe’s main natural gas pipeline. The decline in supply is pushing prices up and Russia hinted that further supply cuts were to come.

    SpaceX fires employees who helped write and distribute a letter condemning Elon Musk. Gwynne Shotwell, SpaceX president and chief operating officer, said in an email to employees that the process of creating and distributing the letter, which called Musk’s behavior a “distraction and embarrassment,” made employees an uncomfortable, feeling intimidated and bullied.”

    Regulators are investigating cryptocurrency lender Celsius amid its collapse. The company faces questions from law enforcement in five states as it tries to remain solvent. Celsius’s previous backers have reportedly told the company, which has frozen recordings, that they can’t help. A growing crypto crash has caused heavy losses for individual and professional investors.

    Michel David-Weill, the former chairman of Lazard, has died aged 89. the firm said. David-Weill was responsible for uniting Lazard in the 1980s, combining three independent partnerships in London, New York and Paris. “Michel’s presence, leadership and vision have defined Lazard today,” the bank’s CEO, Ken Jacobs, told DealBook, calling David-Weill an “excellent skeptic of conventional wisdom.”

    Revlon, the 90-year-old cosmetic brand known for its signature lipstick colors, filed for bankruptcy yesterday. The company is struggling to deal with its $3.8 billion mountain of debt. Some of the factors that led to the bankruptcy were specific to Revlon, such as the closing of debt led by corporate raider Ron Perelman, and a brand unable to compete with younger, hipper rivals. But others, advisers DealBook tell, are a harbinger of bankruptcies to follow. We hear that bankers are already preparing for what could be a busy fall for those who specialize in distressed debt and training.

    Many of the bankruptcies that we expected in 2020 have not materialized. A number of retailers that had already faltered quickly went bankrupt, such as JCPenney and Neiman Marcus. But the infusion of cash Fed-backed companies many expected to file for Chapter 11 bankruptcy. 2020 and by nearly 34 percent in 2021. Some experts warned of a proliferation of zombie companies — companies that make just enough money to survive — and a subsequent drag on the wider economy. At the same time, these companies and others continued to build up debt. U.S. corporate bond issuance is approaching $2 trillion in 2020.

    This year, the default rate on US corporate debt is 40 percent lower so far than last year. according to S&P Global. So far there have only been 15. But there are signs that this could change soon. The “distress ratio” — the share of the junk bond market that S&P says is showing signs of stress — has nearly doubled in the past month to 4.3 percent from 2.4 percent, the biggest monthly jump since March 2020. is still low compared to historical averages.) And this week alone, investors withdrew $6.6 billion from funds buying U.S. high-yield bonds, making it the worst week for corporate bonds since March 2020.

    High inflation, rising interest rates and more cautious consumers could add to the misery. So are supply chains, which are particularly challenging for businesses without the financial flexibility to pay more for a scarce commodity, or to build and deplete inventory as needed. Retailers in particular will be vulnerable given the heavy debt burden many are grappling with, including the Party City decoration and festivity chain and the Belk department store. (And one has to wonder if the recently proposed debt-fueled takeover of department store chain Kohl’s is really a good idea.)

    — Jason Moore, the general manager of the Everson Royce Bar in Los Angeles. The return of workers to offices has also led to: a rebound in the post-work tradition of happy hour†

    LIV Golf, a golf series lavishly funded by Saudi Arabia, is arguing with the PGA Tour, which has suspended 17 of its players for taking part in the fledgling league. Neither opponent is much sympathetic, writes Peter Coy, our Times Opinion colleague who writes a newsletter for subscribers, but the battle does raise an interesting economic question: can trade restriction ever be a good thing? We spoke to Peter about what golf’s battle royale can tell us about the state of competition policy.

    DealBook: Should the government intervene to stop the PGA from banning golfers from joining the LIV?

    Peter Coy: I think it’s a bit early for that. This is a family feud and the players need time to resolve it among themselves. If there is a lawsuit, I would think it will be brought by golfers, or maybe by LIV Golf. If they see no reason to sue, it’s hard to see why the government would want to intervene.

    Do the antitrust questions arising from the PGA-LIV clash apply to the debate over whether Facebook, Google and other Big Tech companies should be considered monopolies and broken up?

    Obviously there are huge differences between golf and technology, but some of the underlying principles are the same. Most antitrust cases are decided on the basis of the rule of reason. An organization accused of anticompetitive behavior, be it the PGA Tour or Google, can get out of trouble by showing that its actions are reasonable and actually benefit consumers.

    The Biden administration has, in part, pointed to the recent rise in inflation as evidence that companies have too much power to raise prices. Does the golf industry support that statement?

    In general, I agree that competition lowers prices, but in this case the connection is hard to see. I can’t imagine the two groups competing by cutting the prices they charge the TV channels, tournament sponsors and so on. In fact, the competition between them results in much larger payouts for golfers. I would expect the golfers to splash their newfound wealth on cars and boats. This could be a weird case where competition drives inflation.

    Offers

    Policy

    • Importers warn of more delivery delays due to a new forced labor law targeting China. (Politics)

    • A surprising treasury tax windfall could disrupt plans to raise rates for the wealthy. (Politics)

    • Three environmental groups have sued the Biden administration for granting thousands of licenses to drill fossil fuels. (The hill)

    • “Forty-nine states have pre-ordered vaccine doses for very young children. Florida didn’t.” (NYT)

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