Bankruptcies Surge as High Rates Continue to Pressure Businesses 💰

🐺 Hi pack-mates,

This is Howling Markets, the brave firefighter that tames the flames of the financial markets for you!

Today we will be covering:

• What Is Bankruptcy? 🏛️

• Can The Biotech Sector Recover? 🔬

• Bankruptcies Surge as High Rates Continue to Pressure Businesses💰

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What is Bankruptcy?

Bankruptcy is a legal proceeding that can be either initiated by the debtor or the creditors when the debtor is unable to make their debt repayments on time.

When this procedure is initiated, the court appoints some professionals called “liquidators” whose role is to evaluate the business and sell it in pieces to try and raise the highest possible amount of money. Then, they will start repaying the creditors, following a precise order which is determined by business law.

For example, bondholders are considered secured creditors, while shareholders are considered unsecured. Therefore, during a bankruptcy procedure, secured creditors must always be fully repaid before unsecured ones, so it often occurs that stockholders receive very little compensation if any.

On balance, a bankruptcy procedure has both positives and negatives. Amongst the upsides, this legal action has the potential to relieve a business from its complex financial position while still repaying (at least partially) the creditors.

On the other hand, bankruptcies come at an extremely high cost. First, the company will have to subtract from their total assets all the expenses incurred in the procedure before repaying the creditors.

Additionally, there is always the risk that some creditor is not repaid, so bankruptcies often cause a decrease in social and economic welfare even when performed perfectly.

Can the Biotech Sector Recover?

The biotech sector has greatly suffered from rising interest rates and the backlash caused by the pandemic. During these years only very few biotech companies received states’ intervention to finance research and development, whereas the majority only incurred significant losses.

Between the beginning of 2021 and May of 2022, the Biotech sector lost almost 65% of its value, and the S&P ETF measuring the performance of biotech companies (ticker: XBI) fell from around $175 to just over $62.

However, thanks to the dovish interest rates expectations that we have been discussing in previous newsletters, since the beginning of November the XBI ETF has surged more than 30%, finally achieving positive returns since the beginning of the year.

On the other hand, it must be said that biotech companies often carry a much higher degree of risk as opposed to companies operating in other sectors. Because of this, they tend to do exceptionally well when people expect easier financial conditions and exceptionally bad when people feel that the enviroment is becoming riskier.

Will you be adding Biotech companies to your investment portfolio in 2024? If so, how do you plan on balancing out their volatility?

Today’s Howling Question

Now that we have discussed how some sectors are recovering from their significant losses, we are also starting to approach the S&P 500 all-time high. More or less, do you remember when this all-time high was set?

a)  At the Beginning of 2021

b)  At the End of 2021

c)  At the Beginning of 2022

d) At the End of 2022

e)  At the Beginning of 2023

Try to answer the question and then check out the correct option after the last interesting news.

Bankruptcies Surge as High Rates Continue to Pressure Businesses

Well, what we most feared might be happening right before our eyes.

While the stock market is booming and is up almost 15% over the last month and a half, the number of corporate bankruptcies increased by 30% over the past year, after a decade of declines.

However, such change is not completely unexpected. In 2023 two big events came together, both pushing bankruptcies through the roof.

On one hand, the post-pandemic state intervention plans reached their final terms and the central banks stopped injecting liquidity in the economy. It is important to remember that the bull run initiated in 2020 was totally artificial and propped up by the quantitative easing (QE) carried out by all central banks all around the world.

On the other hand, the rise of inflation, partially even caused by the QE, brought central banks to rise interest rates in the fastest tightening cycle of the last 30 years, fatally restricting companies’ cashflows and investments.

In the graph below it is traced the policy rate that is set by the Federal Reserve in the United States. From this chart it is possible to notice the speed at which the Feds had to increase interest rates to keep inflation under control, causing the chart to shoot up almost vertically.

Despite the fact that analysts are stating that the number of bankruptcies is still relatively modest based on historic data, do you believe that this trend could continue to increase to a dangerously high level?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

Completely unexpectedly, the stock market continued to creep higher, recording an increase of 0.45% on Monday. This additional move up can be seen as an extension of the rate cut rally that has been going on over the last months in view of easier future growth.

Most notably, today Goldman Sachs has even raised their S&P500 target to $5,100 before the end of 2024, showing extreme signs of optimism considering that today the SPX’s price closed at $4,070.57.

On the other hand, it must be noted that the RSI indicator closed at a dangerously overbought level around 80.5 on a daily timeframe. Over the past 6 years the RSI has reached this level only on another two occasions, once in September 2022, and the other time in January 2018.

Additionally, these two past readings were respectively followed by a 9.5% and a 10.3% drop that in both cases occurred in a matter of two weeks.

On the other hand, the debt market showed some signs of upward momentum right before sliding down by an additional 0.25%.

Can this be the beginning of a reversal in both stocks and bonds? Do you have any open positions in either market?

Answer

The correct answer is c) At the Beginning of 2022.

More specifically, the SPX’s all-time high was set at $4796.57 on Monday 3^rd January 2022, the first trading day of the year.

Howl-Worthy Memes 😂

🐺 See you next time!

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