The Barron's Daily: Everything Is in a Bear Market. How Bad Can It Get?

After the Dow Jones Industrial Average slipped to more than 20% below its January peak on Monday, joining the S&P 500 in a bear market, it’s worth taking a step back to consider how unusual the global selloff has been.

For a start, bonds—now in their first global bear market for 70 years—are falling at the same time as stocks. That’s rare. Bonds are meant to be safe, low-returning investments. They’re what you buy when stocks are falling. Stocks, by contrast, are higher risk but also higher reward. You sell bonds to buy stocks when they’re going up.

That’s Investing 101 and the basis of the textbook portfolio of roughly 60% stocks and 40% bonds.

The reason why the theory is falling apart this year is because of a supply shock. Just as demand was strengthening at the end of the Covid pandemic, energy prices shot up and supply chains became full of kinks, such as the inability of China’s factories to ramp up semiconductor production. This crimped companies’ ability to meet that growing demand at expected prices.

Now that inflation is soaring, central banks have sprung into action to deliver the quickest increases in borrowing costs in a generation. The aim is to reduce demand to get it back in line with supply. That can take some time, and the carnage in markets is just the side effect.

For all the turmoil so far this year, company profits have held up reasonably well, according to the latest gross domestic product report. The next test comes in October as earnings season starts again. Unemployment remains low. Yet the Organization for Economic Cooperation and Development sees a strong chance of a sharper global slowdown next year.

There’s a lot of pain still to come in the real economy.

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Dollar Rally Cools and British Pound Steadies

The U.S. dollar rally cooled early Tuesday and the British pound continued its cautious recovery as global currency markets looked to be stabilizing after a volatile start to the week.

• The U.S. Dollar Index slipped back below 114 but remained close to the fresh 20-year highs of Monday. The pound, which tumbled to a record low of $1.0349 on Monday after the U.K. government unveiled a package of tax cuts at the end of last week, climbed around 1% to $1.08 early Tuesday. It was trading at $1.31 just six months ago.
• The Bank of England, in a statement aimed at reassuring markets after sterling’s slump, said it “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target.” The central bank said it will make a full assessment at its next meeting in November.
• Sterling, which rose in anticipation of the BoE’s announcement and expectations for an emergency rate hike, initially fell back following the statement as traders seemed disappointed with the lack of action.
• A number of mortgage providers, including Halifax and Virgin Money, have temporarily withdrawn mortgage products following the pound’s sharp decline, according to reports.

What’s Next: The pound may have steadied for now but the Bank of England’s next meeting is more than five weeks away, during which time the currency is likely to remain vulnerable.

—Callum Keown

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Business Travel Straining to Recover to Prepandemic Level

Leisure travel roared back this summer, but a full recovery to prepandemic levels for business travel may still be out of the question. Data-tracker Tripbam estimates 15% of business travel may never fully recover, which is better than the 20% it forecast in January.

• Data from CoStar Group’s hospitality analytics arm STR backs that view. While conferences and industry events are seeing a strong rebound, business travel for face-to-face meetings has likely been hurt by videoconferencing.
• Domestic business travel bookings are down 25% from prepandemic levels, hurt by a contracting tech sector. Tripbam estimates that tech hotel bookings will reach 60% to 70% pre-Covid levels next year, with the San Francisco Bay Area lagging because of its tech industry concentration, said Truist analyst C. Patrick Scholes.
• Casino stocks jumped after Macau said tour groups can return to China’s gambling hub in November. Melco Resorts & Entertainment jumped 25%, and Las Vegas Sands and Wynn Resorts climbed 12%. Macau is aiming for about 40,000 visitors a day, half its prepandemic capacity.
• Southwest Airlines has hired and trained 3,000 flight attendants this year, nearly triple the cabin crew total it hired in 2018, with 7,000 more flight attendants in the pipeline, CNBC reported, citing an internal memo. Southwest currently employs more than 62,000.

What’s Next: Starting Oct. 1, Canada is lifting all Covid-19 border requirements, including vaccinations, testing, and isolation for those visiting or returning to Canada by land, air or water entry. Passengers will no longer need to undergo random testing or wear masks at airports or on planes or trains.

—Teresa Rivas and Janet H. Cho

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Porsche Prepares IPO in Lackluster Year for New Offerings

Volkswagen -owned Porsche could price its initial public offering at the high end of the planned range. At $80 a share, the sale should raise more than $9 billion for VW amid an otherwise lackluster environment for IPOs this year.

• The IPO market is the slowest in more than a decade, with just $7.2 billion raised in traditional offerings in the U.S., The Wall Street Journal reported. Last year, traditional offerings raised $154 billion in the busiest year for IPOs on record.
• Roughly 87% of companies that went public in the U.S. last year are now trading below their offering prices, Dealogic said, including Oscar Health and Rent the Runway , down more than 85%, and Marqeta and Robinhood Markets , down more than 70% from their offering prices.
• Some companies that had planned to go public this year are holding off, while others are scrapping their plans altogether. Yogurt maker Chobani canceled its IPO and software company Figma opted to be acquired by Adobe for $20 billion.
• Companies still considering public debuts before the end of 2022 include grocery-delivery company Instacart, Intel’s self-driving-car unit Mobileye, and digital-advertising company Aleph Group.

What’s Next: Porsche will have a market value in the range of $75 billion after its IPO. That almost matches Volkswagen’s market cap of about $83 billion. Porsche declined Barron’s request for comment. Volkswagen is selling roughly 114 million shares starting Thursday.

—Janet H. Cho

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Biden’s Student Loan Forgiveness Could Cost $400 Billion

President Joe Biden’s plan to cancel student loan debt will cost about $400 billion over 10 years, according to a nonpartisan Congressional Budget Office estimate released Monday. The plan could reduce or eliminate debt for 43 million Americans.

• Biden plans to cancel up to $10,000 loans issued on or before June 30, 2022, for individuals earning less than $125,000 a year, and $20,000 for those who got Pell Grants. He also extended a pause on loan repayments until the end of 2022, which the CBO said would cost $20 billion.
• The CBO estimate doesn’t include the cost of a separate measure cutting loan payments to 5% of monthly discretionary income, from the previous 10%. That could cost $120 billion, according to the Committee for a Responsible Federal Budget, which opposes canceling student debt, the Washington Post reported.
• The CBO told Congress that Americans held $1.6 trillion in federal student loans as of June 30, and that about $430 billion of that debt would be canceled under the plan. Republicans criticized it as wasteful and unnecessary, while progressive Democrats wanted to forgive more.
• Some Republican lawmakers and state attorneys general are considering filing a lawsuit to prevent the debt cancellation. The conservative Job Creators Network has said it plans to sue the administration after Education Department guidance is released, the Post reported.

What’s Next: A Census Bureau analysis said Black and Hispanic women, who carry a disproportionate share of student loan debt, would benefit the most from the one-time cancellation. White House officials estimate more than a quarter will have their debts completely forgiven.

—Janet H. Cho

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Sunbelt States See Highest Rate of Real Estate Deal Cancellations

Southern states from Florida to California have been main beneficiaries of the Covid-19 migration from high-cost coastal areas, but that once-hot real estate market is cooling more quickly than other areas of the U.S. with rising interest rates and economic uncertainty, according to Redfin.

• Nationally, deals for 15.2% of homes that went under contract in August fell through, about 64,000 homes, a Redfin report said. In July, 15.5% of home-purchase agreements were canceled. Before the pandemic, the trend was consistently around 12%, the report said.
• But locations with the highest growth in sales since early 2020 have seen higher rates of cancellations. Jacksonville, Florida’s cancellation rate was 26.1% in August. In Las Vegas, the rate was 23%, followed by Atlanta, 22.6%. Orlando’s was 21.9%, according to Redfin.
• The areas with the lowest percentage of called-off contracts are back on the coasts: Newark, N.J., 2.7% was first, Redfin said, followed by San Francisco, 4.2%, Long Island’s Nassau County in New York, 6.1%, and New York City, 7%.
• Apartment asking rents nationally fell 0.1% in August, according to property data tracker CoStar Group, the first monthly drop in rent since December 2020. Rents have risen 23% since August 2020, Realtor.com data showed.

What’s Next: The Census Bureau and Department of Housing and Urban Development will release new home sales data for August later this morning. The expectation is for sales at a seasonally-adjusted annual rate of 495,000, down from July’s rate of 511,000, according to FactSet.

—Liz Moyer and Mansion Global