By: Ella Koeze·Data delayed at least 15 minutes·Source: FactSet
Stocks slid on Thursday after Jerome H. Powell, the Federal Reserve chair, declined to outline specific measures he would use to push back against the recent rise in long-term interest rates that has unnerved investors over the last week.
While Mr. Powell spoke in an online interview with The Wall Street Journal, the S&P 500 index, which had been up more than half a percent, fell into negative territory. It ended the day down 1.3 percent, its third consecutive decline.
As has been the case recently, the decline in the stock index was the result of action in the government bond market. Throughout Mr. Powell’s speech, the yield on the 10-year Treasury note, an important benchmark that influences the cost of borrowing for companies and households alike, crept higher, eventually reaching 1.54 percent.
“The market was hoping for something more concrete in terms of commentary on, you know, ‘These are steps we will take or could possibly take if we need to exercise more control over the long end,” Chris Jacobson, a Susquehanna Financial Group strategist. He added that the market “seemed to be disappointed that we didn’t get anything to that effect.”
Rising bond yields hurt stocks in part because higher returns on bonds make them a more compelling place for investors to put their money. Stocks with high prices and low profits — such as many of the smaller technology stocks that have been huge winners over the last year — fare the worst when rates rise.
That was the case on Thursday. The Nasdaq composite index was down more than 3 percent at its lowest point, briefly pushing the tech-heavy benchmark 10 percent off the record high it reached in February. Sell-offs that large are known as corrections, a Wall Street term of art that indicates something more serious than a garden-variety downturn. The index ended the day down 2.1 percent, narrowly missing that threshold.
When asked if the bond market was wrong to push rates higher, Mr. Powell seemed to sidestep the question, emphasizing that he would be worried if he saw markets getting out of control or if rates climbed to levels that hurt economic growth.
“I would be concerned by disorderly conditions in markets or a persistent tightening of financial conditions that threatens the achievement of our goals,” Mr. Powell said. “I would be concerned if those things were to happen.”
Bond yields reflect what investors think about the economy. When the economy is strong, yields tend to be high. When it’s weak, they tend to be low.
Investors have pushed yields higher in recent weeks as updates on retail sales and industrial production have shown the economy to be on increasingly solid footing and as the rate of Covid-19 vaccinations has increased. The Biden administration’s $1.9 trillion economic stimulus plan is also expected to be enacted shortly.
All that is good news for the economy. Wall Street economists now expect American gross domestic product to grow at its fastest pace since 1984.
But strong growth is historically linked to higher inflation, the mere risk of which has traditionally pushed the Fed to raise the interest rates it sets — the main tool it uses to try to manage economic growth. The near-zero interest rates set by the Fed in March 2020 were a large part of the reason stocks performed so well last year despite the death and economic devastation of the pandemic.
Genesis Healthcare, one of the nation’s largest nursing home companies, said this week that it was getting a badly needed cash infusion from a private equity firm and planned to delist its publicly traded stock and in effect go private.
The cash infusion of at least $50 million will stabilize Genesis, which had raised the prospect of filing for bankruptcy protection. Last year, the company received more than $300 million in federal government grants and loans to help it grapple with the coronavirus pandemic.
The company said in a release on Wednesday that a newly formed private equity firm called RenGen Healthcare would provide it with $50 million in cash and might provide up to $25 million in additional financing. RenGen is affiliated with Pinta Capital Partners, a New York investment firm that specializes in health care.
The company said it anticipated that the last day its shares, which currently trade for well under $1, would trade on the New York Stock Exchange would be March 25. Once its shares are delisted, Genesis said, it will no longer be required to file periodic financial reports with the Securities and Exchange Commission. The shares will continue to trade on the less-regulated over-the-counter market.
Genesis, based in Pennsylvania, operates more than 325 nursing homes and assisted-living centers in 24 states. It had been owned by another private equity firm before going public in 2015.
The company has been saddled with hefty debt obligations because it rents most of its facilities from corporate health care landlords. As part of the restructuring, Genesis said it had struck a deal with one of its biggest landlords, Welltower, to give up 51 facilities it leases from the real estate investment trust. The deal will also enable Genesis to reduce some of the $423 million in debt it owes to Welltower.
Decades of private ownership of nursing homes, including by private equity firms, have left many facilities with razor-thin margins. For-profit nursing homes — roughly 70 percent of the country’s 15,400 nursing homes — disproportionately lag behind their nonprofit counterparts across a broad array of measures for quality, according to a New York Times analysis.
Gap, one of the country’s biggest operators of mall stores, had a very online holiday season, according to its earnings report on Thursday, highlighting the toll that the pandemic has taken on physical retail space.
The company, which posted a 5 percent sales decline to $4.4 billion in the fourth quarter, said that online sales grew 49 percent in the period from a year earlier while store sales dropped by 28 percent. Store revenue tumbled because of mandated closings internationally, stay-at-home restrictions in the United States and “strategically planned permanent store closures,” Gap said in a statement.
Gap, which owns its namesake chain, Banana Republic, Old Navy and Athleta, oversees thousands of stores in North America, and the company’s performance is a gauge of consumer spending and trends at malls. The company has seen its family-friendly Old Navy brand and the pricier athleisure line Athleta perform better than Gap and Banana Republic in the past year — a trend that persisted in the fourth quarter.
The company, based in San Francisco, signaled a note of optimism for the back half of the year, however. It forecast “mid- to high-teens growth” from the past year, a prediction that assumed pandemic “impacts persisting in the first half of 2021 and a return to a more normalized, pre-pandemic level of net sales in the second half of 2021.”
The Congressional Budget Office projected on Thursday that the federal budget deficit will begin to decline in the coming years as the United States economy recovers from the coronavirus pandemic but will rise again during the second half of the decade and climb steadily over the following 20 years.
The projections offer near-term hope for the nation’s fiscal situation, which is expected to improve as government spending on the pandemic subsides when normal business activity resumes as more Americans get vaccinated and find employment. But the nonpartisan office forecast a more challenging long-term outlook, as interest costs rise and federal spending on health programs swells along with an aging population.
The outlook also does not reflect the additional spending that Congress is expected to approve this year, which will likely include a $1.9 trillion stimulus bill and a large infrastructure package. That package, which will be financed with borrowed money, is expected to exacerbate the budget deficit in the near-term, according to previous C.B.O. estimates.
The C.B.O. said that the federal budget deficit — the gap between what the U.S. spends and what it takes in taxes and other revenue — is expected to be 10.3 percent of gross domestic product this year, the second-highest level since 1945. The deficit is expected to decline to 5.7 percent of G.D.P. by the end of the decade as spending to combat the pandemic eases and growth picks up. But in the following two decades the budget gap will again widen, climbing to 13.3 percent by 2051, it said.
Federal debt held by the public is expected to be 102 percent of G.D.P. by the end of this year and nearly double that — 202 percent — in 30 years. The C.B.O. warned that such high debt levels will lift borrowing costs, slow economic output and raise the risk of a fiscal crisis.
Jerome H. Powell, the chair of the Federal Reserve, said he and his colleagues had a “high standard” for what full employment meant, underscoring that the central bank is likely to be very patient in removing monetary support for the economy.
“Four percent would be a nice unemployment rate to get to, but it will take more than that to get to maximum employment,” Mr. Powell said, adding that it is unlikely that the job market will return to full speed this year.
Mr. Powell, speaking in an online question-and-answer session hosted by The Wall Street Journal, laid out the high hurdles the economy needed to meet before the Fed would pull back its cheap money policies, which include rock-bottom interest rates and large-scale bond purchases.
“It’s going to take some time,” he said.
Mr. Powell was speaking at a time when investors had begun to pencil in higher inflation and the prospect that interest rate moves will come sooner than expected. The Fed is trying to guide the economy toward both full employment and stable inflation that averages 2 percent over time. Longer-term bond yields have moved up since the start of the year as investors grow optimistic about an economic rebound and antsy about how that will change the Fed’s stance.
Mr. Powell acknowledged on Thursday that the Fed was watching the fluctuation in markets, saying that he “would be concerned” by disorderly conditions in bond markets or a substantial rise that makes credit expensive and threatens the Fed’s goals. But he pushed back on the idea that the central bank was going to remove help rapidly.
“That’s going to depend entirely upon the path of the economy,” Mr. Powell said of rate increases. He said the country had to get to maximum employment, inflation must sustainably reach 2 percent, and those price gains must be on track to exceed 2 percent for a period before the Fed would contemplate lifting interest rates.
The Fed chair also drew a distinction between a short-term increase in price gains — which is expected to happen for technical reasons this year — and a sustained acceleration in inflation.
“If we do see what we believe is likely a transitory increase in inflation” then “I expect that we will be patient,” Mr. Powell said.
When it comes to the job market, Mr. Powell pointed out that there were 10 million fewer jobs than before the pandemic, leaving a lot of room for a rebound.
“There’s good reason to expect job creation to pick up in coming months,” Mr. Powell said. “We need that.”
The Nasdaq composite index fell 2.1 percent on Thursday, a drop that left the tech-heavy benchmark down 9.7 percent from the record it reached in February.
A drop of 10 percent from a high is known as a correction, a Wall Street term that indicates something more serious than a garden-variety downturn.
Stocks that soared during the pandemic last year were slammed on Thursday. Shopify, which helps retailers develop e-commerce operations and saw its shares rise nearly 200 percent last year, was down nearly 6 percent. The tech security firm CrowdStrike, up more than 300 percent last year, was down more than 8 percent on Thursday.
Some of the largest stocks were also lower, weighing on both the Nasdaq and the broader S&P 500 index.
Apple dropped more than 1.5 percent and is down 16 percent since Jan. 25. Tesla dropped nearly 5 percent, bringing its losses from its January high to 29 percent.
The 10 percent threshold for a correction is arbitrary, but it is often an indication that investors have turned more pessimistic about the markets.
The decline in the stock markets was set off as investors, concerned that an economic recovery would mean the Federal Reserve would pull back on its easy-money policies, poured money into government bonds, which are considered more secure.
The market conniptions of recent days are a direct result of several developments that point to the brightening prospects of economic recovery. Vaccinations are rising, retail sales and industrial production have been surprisingly solid and, perhaps most important, the Biden administration is expected to push its $1.9 trillion stimulus plan through Congress in the coming days.
One clear consequence is expected to be strong growth. Wall Street economists now expect output to rise by nearly 5 percent in 2021. Such robust growth — it would be the best year for the economy since 1984 — would seem like a good thing for stocks.
But growth brings with it the possibility of rising inflation, which in turn could prompt the Federal Reserve to raise interest rates — and that’s what investors are reacting to, with different consequences for the stock and bond markets, Matt Phillips reports for The New York Times.
Few economists see a significant risk of runaway inflation, but investors say that the mere possibility of painful price growth might drive the Fed to raise interest rates to tamp down the economy.
That would be bad for bond owners. If the Fed raised rates, rates around the bond market would climb. Then the price of bonds that investors hold would have to fall until they produced yields that were comparable to the new, higher rates in the market.
In expectation of that, investors are demanding a higher return now in the form of a higher yield on their bonds. Higher rates can be a problem for the stock market’s performance. One reason is that high interest rates make owning bonds more attractive, coaxing at least some dollars out of the stock market. Higher rates can also make borrowing more expensive for companies, especially smaller ones that have potential but lack a track record of profitability.
The United States will suspend retaliatory tariffs against Britain for four months, including on Scotch whisky, arising from the longstanding trade dispute about subsidies for Boeing and Airbus. The two governments said they would use the time to try to come up with a long-term solution to the trade disagreement.
Since Britain left the European Union, it has sought to forge its own trade policy and secure a free-trade deal with the United States. On Jan. 1, the British government ended its retaliatory tariffs on Boeing and other goods, which were imposed by the European Union, in an effort to smooth over its relationship with the Biden administration. The decision essentially separated Britain from the dispute about aircraft subsidies between the European Union and United States. (That said, the U.S. trade representative argued Britain did not have the legal standing to keep imposing these tariffs outside the bloc.)
The tariff suspension is expected to help several types of British exporters, especially the Scotch whisky industry. In October 2019, a 25 percent tariff was placed on Scotch whisky and exports to the United States have since dropped 35 percent, costing companies more than £500 million (about $700 million), the industry’s trade group said. Cashmere and Stilton cheese producers will also benefit, the government said.
The decision “shows what the U.K. can do as an independent trading nation, striking deals that back our businesses and support free and fair trade,” Boris Johnson, Britain’s prime minister, said in a statement.
The suspension “will allow time to focus on negotiating a balanced settlement to the disputes, and begin seriously addressing the challenges posed by new entrants to the civil aviation market from nonmarket economies, such as China,” the Office of the U.S. Trade Representative and British Department of International Trade said in a joint statement.
Almost a year ago, on March 11, the World Health Organization officially declared that the spread of the coronavirus was a pandemic. Lockdowns and social distancing soon became a fact of life, and companies that rely on people gathering and moving around were hit hard.
But in recent weeks, many of these businesses have said they see signs that people are preparing to go out again: to the office, on vacation and elsewhere. Taken together, the DealBook newsletter notes, these indicators suggest that a reopening might be around the corner, as vaccines roll out, the weather changes or people simply seek out something new after so long in isolation. (Scientists say that people should be careful even after being vaccinated.)
Apparel. Richard Hayne, the chief executive of Urban Outfitters, told investors this week that its brands had recently been selling more “going out-type apparel.” In the last week of February, seven of Anthropologie’s top 10 sellers online were dresses, which may suggest that shoppers are preparing for life beyond Zoom. “Over the past year, we were lucky if they included one or two dresses,” Mr. Hayne said.
Concert tickets. “We’re feeling more optimistic than we were a month ago,” Live Nation’s chief executive, Michael Rapino, said on an earnings call last week. When the company recently released nearly 200,000 tickets for summer music festivals in Britain, they sold out in days.
Trips to Vegas. Tom Reeg, the chief executive of the casino giant Caesars Entertainment, told analysts that bookings were up 20 percent month on month. “It’s almost like a switch was flipped sometime late January, early February,” he said last week. Apollo Global Management’s co-head of private equity, David Sambur, cited these numbers when explaining the firm’s big bet on a Las Vegas recovery: the $6.25 billion acquisition of the Venetian casino and expo center announced on Wednesday.
Cruise bookings. Royal Caribbean’s chief executive, Michael Bayley, recently told investors that the company recorded a 30 percent jump in new bookings this year, compared with the last two months of 2020. A large share are people over 65, who are counting on being vaccinated soon, Mr. Bayley suggested. The company, which suspended most cruises through April, began a $1.5 billion stock sale this week.
Gym memberships. January was the first month that Planet Fitness saw a net increase in memberships since the pandemic began, according to Chris Rondeau, the gym chain’s chief. The uptick “reinforces our belief that people want to return to bricks-and-mortar fitness,” he told analysts.
But not movie tickets (yet). Alamo Drafthouse filed for bankruptcy on Wednesday, making it one of the most prominent movie chains to seek Chapter 11 protection during the pandemic. Still, it expressed some optimism, “because of the increase in vaccination availability, a very exciting slate of new releases and pent-up audience demand,” said Tim League, the company’s founder.
What did Jay-Z and Jack Dorsey talk about when they went yachting around the Hamptons together last summer? Perhaps only Beyoncé knows.
Maybe now we do, too. Square, the mobile payments company led by Mr. Dorsey, announced on Thursday its plan to acquire a “significant majority” of Tidal, the streaming music service owned by Jay-Z and other artists — including Beyoncé, Jay-Z’s wife, and Rihanna, who is a client of Jay-Z’s entertainment management company, Roc Nation.
Square will pay $297 million in stock and cash for the stake in Tidal. Jay-Z will join Square’s board.
The announcement comes less than two weeks after Jay-Z announced that he would sell 50 percent of his champagne company, Armand de Brignac — better known as Ace of Spades — to LVMH Moët Hennessy Louis Vuitton amid a downturn in the entertainment industry caused by the pandemic that has affected some of Jay-Z’s holdings.
“I think Roc Nation will be fine,” Jay-Z said in an interview last month about the sale of Armand de Brignac. “Like all entertainment companies, it will eventually recover. You just have to be smart and prudent at a time like this.”
Also last month, Mr. Dorsey, who is also the chief executive of Twitter, announced that he and Jay-Z had endowed a Bitcoin trust to support development in India and Africa.
Tidal, which Jay-Z bought in partnership with other artists in 2015 for $56 million, provides members access to music, music videos and exclusive content from artists, but the streaming music industry has been dominated by competitors like Spotify, Apple and Amazon.
In 2017, Jay-Z sold 33 percent of the company to Sprint for an undisclosed amount. (After a merger, Sprint is now a part of T-Mobile.) Earlier this week, Jay-Z bought back the shares from T-Mobile, and most will be sold to Square as part of the deal.
Mr. Dorsey and Jay-Z began to discuss the acquisition “a few months ago,” said Jesse Dorogusker, a Square executive who will lead Tidal on an interim basis.
“It started as a conversation between the two of them,” he said. “They found that sense of common purpose.”
Mr. Dorogusker said Square, which was founded in 2009, will offer financial tools to help Tidal’s artists collect revenue and manage their finances. “There are other tools they need to be successful and that we’re going to build for them,” he said.
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The Biden administration unveiled a plan on Thursday to invest $9 billion in minority communities, taking a step in fulfilling its promise to ensure that those who have been hit hardest by the pandemic have access to loans as the economy recovers. The Treasury Department said that it was opening the application process for its Emergency Capital Investment Program, which will provide a major infusion of funds to Community Development Financial Institutions and Minority Depository Institutions as they look to step up lending.
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Facebook said on Wednesday that it planned to lift its ban on political advertising across its network, resuming a form of digital promotion that has been criticized for spreading misinformation and falsehoods and inflaming voters. The social network said it would allow advertisers to buy new ads about “social issues, elections or politics” beginning on Thursday, according to a copy of an email sent to political advertisers and viewed by The New York Times.
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Darren W. Woods, the chief executive of Exxon Mobil, said in an interview before an annual presentation to investors that Exxon would try to set a goal for not emitting more greenhouse gases than it removed from the atmosphere, though he said it was still difficult to say when that might happen. Under pressure from activist investors, Exxon said this week that it was adding two new directors with no previous ties to fossil fuels to its board. The company recently said it would create a new business that captured carbon dioxide from industrial plants and buried it deep in the ground. It also recently invested in Global Thermostat, a company that aims to suck carbon dioxide out of the air.