Stock futures are rising, with technology shares on track to lead gains ahead of a policy decision from the Federal Reserve. Here’s what we’re watching in Wednesday’s trading:
shares fell 14% premarket after the cloud security firm issued guidance below expectations for the current quarter and lowered its annual outlook as supply-chain issues crimp its ability to meet demand.
named a new chief executive officer and made changes to its board Tuesday, moves that will allow the railroad operator to avert a proxy fight. Investors were quiet; the stock was flat premarket.
edged down 0.1% after the financial services company said profit fell in the fourth quarter, but beat analysts’ consensus projections, as revenue increased due to strong credit results.
are among the companies reporting earnings after the close.
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A mania in clean-energy stocks holds lessons for ESG investors, writes James Mackintosh. This is the third in a series of Streetwise columns taking a critical look at sustainable investing.
Global stocks, oil and cryptocurrencies fell, as investors grappled with the prospect of higher interest rates and disappointing results from popular consumer tech stocks.
Futures tied to the S&P 500 fell 0.4%, pointing to an extension of Thursday’s drop, when the index closed down 1.1%. Nasdaq-100 futures declined 0.7%, suggesting more losses for technology stocks. Dow Jones Industrial Average futures ticked down 0.1%.
Shares in Asia-Pacific and Europe broadly retreated. The pan-continental Stoxx Europe 600 fell 1.2%, while China’s Shanghai Composite Index and Japan’s Nikkei 225 declined 0.9%.
“As we return to a more normal world, names like Peloton and Netflix being weaker or disappointing isn’t a surprise,” said Arun Sai, a multiasset strategist at Pictet Asset Management. “I think when the dust settles, we’ll have a reasonable set of numbers in Q4 earnings. Peloton and Netflix are more of a distraction than anything else.”
This has hit growth stocks and put the Nasdaq in correction territory, as investors are dumping shares of unprofitable companies. Tensions between Russia and NATO are also weighing on market sentiment, investors said. The S&P 500 is down 3.9% this week, on track for the worst performance since Oct. 2020.
“Geopolitical risk plays a role, repricing of [central bank] policy plays a role and the inflation mix in the sense of cost pressures. You put all those together and there is actually quite a change,” said Georgina Taylor, a multiasset fund manager at Invesco. “Risk premium for equities needs to go up.”
President Biden said on Wednesday that the U.S. is ready to unleash sanctions against Russia if President Vladimir Putin makes a move against Ukraine. Biden also laid out a possible diplomatic resolution. Photo: Susan Walsh/Associated Press
Investors’ bets on faster rate rises have driven up inflation-linked bond yields, seen as a benchmark for financing costs. The yield on the 10-year Treasury inflation-protected security rose as high as minus 0.526% Friday, the highest level since June 2020, before easing slightly to minus 0.536%. The yield on the benchmark 10-year Treasury note edged down to 1.792% from 1.833% Thursday.
Cryptocurrencies tumbled, with bitcoin losing nearly 6.5% compared with its level at 5 p.m. ET Thursday. It traded below $38,300, the lowest level since August, before rising slightly to around $38,700. Ether fell 6.8%.
Oil prices also declined. Global benchmark Brent crude fell 1.5%, trading at $87.03 a barrel, weighed down by a surprise increase in U.S. crude stockpiles, according to analysts at RBC Capital Markets.
fell 10% after it posted an operating loss and lowered its guidance, citing supply-chain constraints. Shares of some Chinese drugmakers surged after they were selected to help make cheaper versions of Merck’s Covid-19 pill.
The stock market’s winter selloff deepened this week, pushing all three major indexes further into the red for 2022.
The S&P 500 and Dow Jones Industrial Average both fell a second straight week, while the Nasdaq Composite has been down the last three. Investors continued to sell bonds, pushing the yield on the benchmark 10-year U.S. Treasury note up for a fourth straight week, notching its biggest rise over that stretch since mid-March.
Investors were still assessing the outlook for interest rates and how fast the Federal Reserve will move to tame inflation, roiling the stock and bond markets. At the same time, a rise in Covid-19 cases has weighed on sentiment, although there are signs that infections may be nearing a peak.
The week started on shaky footing, with stocks broadly falling and the Nasdaq nearing a correction before closing slightly higher. On Tuesday, Fed Chairman
Jerome Powell
reaffirmed the central bank’s view that inflation will likely peak by the middle of the year, while also suggesting interest rates will remain low. That helped halt a streak of declines for the S&P 500 and Dow industrials.
Stocks, especially hard-hit sectors such as tech, appeared to regain some ground. But new pricing data released Wednesday and Thursday showed inflation remained hot last month, complicating the outlook. Stocks dropped Thursday, led by a 2.5% slide in the Nasdaq.
Lackluster earnings from some big U.S. banks, along with weak retail sales and manufacturing data, sent most of the market lower again on Friday until a late-session buying rush pushed the S&P 500 and Nasdaq back into positive territory. The S&P 500 added 3.82 points, or less than 0.1%, to 4662.85, and the Nasdaq gained 86.94 points, or 0.6%, to 14893.75. The Dow fell 201.81 points, or 0.6%, to 35911.81.
“We expect a more volatile environment, with big up days and big down days. Perception of inflation will be a driving force in the direction of the market,” said
David Donabedian,
chief investment officer of CIBC Private Wealth US. “It will be a bumpy ride.”
The late Friday turnaround wasn’t enough to avert another down week. The S&P 500 and Nasdaq ended up falling 0.3% over the last five trading days, while the Dow shed 0.9%. Markets are closed Monday for Martin Luther King Jr. Day, shortening next week’s trading schedule.
The U.S. dollar last year saw its largest increase in value since 2015. That is good for many American consumers, but it could also put a dent in stocks and the U.S. economy. WSJ’s Dion Rabouin explains. Photo illustration: Sebastian Vega/WSJ
On Friday, the first dose of fourth-quarter corporate earnings reports gave investors a sobering outlook on corporate growth this year. Quarterly profits fell by double-digit percentages at
posted higher quarterly profit, and market gains lifted the investment firm’s assets under management above $10 trillion. Despite that, its shares declined $18.98, or 2.2%, to $848.60.
Still, analysts remain upbeat on corporate profits, predicting growth across the S&P 500.
Mark Haefele,
chief investment officer at UBS Global Wealth Management, said he expects another positive quarter, with earnings growth of 30% over the prior year.
Manufacturers, material firms and consumer discretionary stocks were also down following the economic data. Besides that,
declined $8.93, or 2.8%, to $308.46 after the paint maker lowered its guidance, citing a shortage of raw materials amid supply-chain and labor constraints.
Rising yields have motivated investors to rotate out of technology stocks.
Photo:
Courtney Crow/Associated Press
Some buying of large-cap growth stocks gave the market, and the Nasdaq, some support, as investors returned to a trade that tends to work well during periods of economic uncertainty.
jumped after Macau released a draft law that would cut the tenure for new casino licenses in half, but wouldn’t reduce the number of licenses. Las Vegas Sands added $5.33, or 14%, to $42.99, and Wynn Resorts gained $7.24, or 8.6%, to $91.47.
Meanwhile, bond yields resumed their climb. Expectations for an interest-rate rise as soon as March have caused some investors to sell government bonds, pushing up yields. The yield on the benchmark 10-year Treasury note ticked up to 1.771% Friday, from 1.708% Thursday.
“Equity markets will continue to take their cues from the bond market,” said
Hugh Gimber,
a strategist at J.P. Morgan Asset Management. “What’s becoming clear is the Fed is realizing that inflationary pressures are larger and more broad-based than they previously expected.”
Cryptocurrency dogecoin jumped 12% from its 5 p.m. ET level Thursday after Elon Musk said Tesla was accepting payment for some merchandise with the currency, which was originally started as a joke. Bitcoin was recently down less than 1%.
Overseas, the pan-continental Stoxx Europe 600 fell 1%.
South Korea’s central bank raised interest rates to pre-pandemic levels to fight inflation, and signaled that more increases could come this year. The country’s benchmark Kospi index declined 1.4%. Other major Asian stock indexes also closed lower. China’s Shanghai Composite fell 1%, and Japan’s Nikkei 225 shed 1.3%.
Corrections & Amplifications For the week, the Dow Jones Industrial Average fell 0.9%, and the Nasdaq Composite fell 0.3%. An earlier version of this article incorrectly said it was the Dow that fell 0.3% and the Nasdaq that declined 0.9%. (Corrected on Jan. 14)
said construction work has resumed at more than 90% of its stalled residential projects, adding that it has picked up the pace of delivering apartments promised to home buyers across the country.
in a statement Sunday night, said more than 80% of its suppliers of materials and decorative services have “resumed cooperation,” and that it has signed thousands of new contracts with various suppliers. At the end of August, the developer disclosed that construction had been suspended at some projects after it fell behind on payments. And by October, hundreds of Evergrande’s unfinished developments were affected by work stoppages.
With just a few days to go before the end of 2021, Evergrande said it intends to deliver 39,000 homes in 115 projects to buyers across China in December. It compared that to its completion of fewer than 10,000 units in each of the preceding three months.
The world’s most indebted real-estate firm Evergrande has embarked on a social media campaign to show construction has resumed and says it’s doing whatever it takes to deliver homes. WSJ compares these posts with ones from upset buyers. Photo Composite: Emily Siu
In a post on social media Monday, Evergrande said apartment projects have been handed over in batches in 18 provinces and it released photos of completed buildings adorned with bright red decorations and people signing papers to take ownership of their homes.
Despite this, Evergrande still has many more commitments to fulfill and its debt crisis remains unresolved. The 25-year-old developer used to be one of the country’s largest by contracted sales and is on the hook to deliver units to more than one million people. Many buyers made large down payments on unfinished flats, expecting to take ownership of them in a few years.
Hui Ka Yan,
Evergrande’s founder and chairman, said that “under the care and guidance of governments at all levels,” as well as support from partners, financial institutions and other constituents, the developer has made progress in its commitments to homeowners.
He added that Evergrande would do whatever it takes to resume work and deliver homes and predicted that the firm will eventually be able to “resume sales, resume operations, and pay off debts.”
Hui Ka Yan, China Evergrande’s chairman, in Hong Kong in 2019.
Photo:
Paul Yeung/Bloomberg News
The company’s statement followed comments over the weekend from two Chinese regulators which said they would safeguard the rights of homeowners and keep the property sector stable. Beijing has been trying to prevent Evergrande’s debt crisis from hurting the many small businesses and ordinary citizens that the developer owes money and apartments to.
Wang Menghui,
head of China’s Ministry of Housing and Urban-Rural Development, said in an interview with the state-run Xinhua News Agency that the regulator will address the risks of some leading developers that fail to deliver projects on time, with the goal of “guaranteeing home deliveries, protecting people’s livelihoods and maintaining social stability.”
The People’s Bank of China separately said—as part of a wide-ranging statement on the economy—that it would protect the rights and interests of homeowners and promote the healthy development of the country’s real-estate market.
Evergrande, the world’s most indebted developer, has been struggling under the weight of roughly $300 billion in liabilities, including around $20 billion in international bonds. The developer has missed payment deadlines on some of its dollar bonds, setting the stage for a massive and complex restructuring. Major credit raters have declared it to be in default.
Earlier this month, the conglomerate sought help from the government of its home province, Guangdong. It has since set up a risk-management committee that includes representatives from several state-backed entities.
Evergrande recently said the committee is working to help contain its risks and will engage with its creditors. Some international bondholders, however, have said there has been little communication from the company so far, the Journal reported last week.
The company’s Hong Kong-listed shares have plunged in value this year to historic lows and its dollar bonds are trading at deeply distressed levels. Markets in Hong Kong were closed Monday for a public holiday.
Stock futures are down at the end of a week that saw major central banks chart divergent courses as they confront inflation. Here’s what we’re watching in Friday’s action:
shares ran out of gas premarket, dropping 9.6%. The electric-vehicle startup plans to start construction next year on a second U.S. manufacturing facility in Georgia, placing a hefty bet on its ability to steadily increase sales in the coming years.
added 5.5% premarket. The company posted a 14% increase in revenue for its fiscal second quarter, as higher shipping rates helped offset rising costs from labor shortages.
is in talks to buy the electronic-medical-records company, according to people familiar with the matter, a deal that could be worth around $30 billion. Oracle shares slipped 3.6% premarket.
Cerner’s stock got a premarket boost after it was reported that Oracle was in talks to acquire the company.
added 3.7% premarket, but that’s not much after the prior day’s 34% loss for the crypto stock. The shares have been subject to large swings since the company went public in October, including more than tripling Oct. 25 on news of a
slipped 1.1%. Health authorities said the rate of a rare but serious blood-clotting disorder associated with the Johnson & Johnson Covid-19 vaccine is higher than previously detected.
is among the companies reporting earnings on Friday.
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Investors say Chinese authorities are likely to ease up somewhat on the embattled real-estate sector and to loosen monetary policy, helping support Chinese corporate borrowers more broadly.
A historic surge of cash has swept into exchange-traded funds, spurring asset managers to launch new trading strategies that could be undone by a market downturn.
This year’s inflows into ETFs world-wide crossed the $1 trillion mark for the first time at the end of November, surpassing last year’s total of $735.7 billion, according to Morningstar Inc. data. That wave of money, along with rising markets, pushed global ETF assets to nearly $9.5 trillion, more than double where the industry stood at the end of 2018.
Most of that money has gone into low-cost U.S. funds that track indexes run by Vanguard Group,
, which together control more than three-quarters of all U.S. ETF assets. Analysts said rising stock markets, including a 25% lift for the S&P 500 this year, and a lack of high-yielding alternatives have boosted interest in such funds.
“You have this historical precedent where you have tumultuous equity markets, and more and more investors have made their way to index products,” said
Rich Powers,
head of ETF and index product management at Vanguard.
Asset managers are looking to actively managed funds, some with narrow themes, in search of an unfilled niche not already dominated by the industry’s juggernauts, analysts and executives said. VanEck, for example, earlier this month rolled out an active ETF targeting the food industry. In March, Tuttle Capital Management launched its
which is bullish on stocks popular with individual investors.
Firms including Dimensional Fund Advisors have converted mutual funds into active ETFs. Meanwhile, bigger firms have rolled out ETFs that mimic popular mutual funds, including Fidelity Investments’ Magellan and Blue Chip Growth funds.
“We should have a broad offering of ETFs that stand alongside a broad offering of mutual funds,” said
Gerard O’Reilly,
Dimensional’s co-chief executive, of his company. “Choose your own adventure.”
As ETFs, baskets of securities that trade as easily as stocks, have boomed this year, investors poured a record $84 billion into ones that pick combinations of securities in search of outperformance rather than tracking swaths of the stock market. That represents about 10% of all inflows into U.S. ETFs, up from nearly 8% last year, according to Morningstar.
Asset managers long known for running mutual funds are rushing to take advantage of investors’ interest in active ETFs. More than half of the record 380 ETFs launched in the U.S. this year are actively managed, according to FactSet. Fidelity, Putnam and
are among the firms that have rolled out actively managed ETFs in 2021. Firms new to ETFs have also entered the fray.
The top 20 fastest-growing ETFs, largely run by Vanguard and BlackRock, this year pulled in nearly 40% of all flows, charged an average fee of less than 0.10 percentage point and tracked benchmarks of some sort.
Many active ETFs remain comparatively small and charge fees higher than passive funds, putting a swath of new products at risk of closing over the next several years. ETFs usually need between $50 million and $100 million in assets within five years of launching to become profitable, analysts and executives say; funds below those levels have tended to close.
Of the nearly 600 active ETFs in the U.S., three-fifths have less than $100 million in assets, according to FactSet data. More than half are below $50 million.
“You’re going to see a lot of those firms take a hard look at their future,” said
Elisabeth Kashner,
FactSet’s director of ETF research.
The stock market’s bull run has helped buoy many ETF providers, Ms. Kashner said, adding that firms have in 2021 closed the fewest number of funds in eight years. But a market pullback, which most stock-market strategists anticipate, could flush out weaker players, she said.
Vanguard has been a beneficiary of high inflows to funds that track indexes. A statue of founder John C. Bogle.
Photo:
Ryan Collerd for The Wall Street Journal
ETF closures generally climbed over the past decade, and firms closed a record 277 ETFs last year as the coronavirus pulled markets down. Many held few assets. About a third of all active ETFs are marked as having a medium or high risk of closure, according to FactSet data that take into account assets, flows and fund closure history.
Factors that have helped stoke active launches, analysts and executives said, include rules streamlined by regulators in late 2019 that made ETFs easier to launch. The approval of the first semitransparent active ETFs, which shield some holdings from the public’s eye, followed.
Analysts also said the success of ARK Investment Management Chief Executive
Cathie Wood
in 2020 showed how active ETFs can score big returns and pull in substantial sums of money. Several of ARK’s funds doubled last year, and its assets approached $60 billion earlier this year, though many of its bets have slumped in 2021.
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Most other active managers aren’t doing much better. Two-thirds of large-cap managers of mutual funds have fallen short of benchmarks this year, while roughly 10% of the 371 U.S. active ETFs with full-year performance data are beating the S&P 500. More than a third are flat or negative for 2021.
“Active management is a zero-sum game,” said FactSet’s Ms. Kashner. “Beating the benchmark quarter after quarter, year after year, is a very difficult task at which active managers have traditionally struggled. The ETF wrapper doesn’t change that calculus.”
Investments in private companies are saving the year for stock-picking hedge funds.
Prominent managers that invest in both public and private companies in the same funds have seen their portfolio of public investments flail, weighed down by losses from January’s meme-stock rally and a retreat by fast-growing technology stocks. But soaring valuations of private companies and a hot U.S. IPO market have boosted their private wagers. That has helped mask their poor performance in public markets and driven up their overall returns.
Dan Sundheim’s $25 billion D1 Capital Partners, for example, is down 4% in its public bets for the year through September—but up 71% before fees in its private investments, said people familiar with the firm. The S&P 500 had a total return of 15.9% for the period.
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D1 clients opt into share classes that offer varying levels of exposure to private investments. Clients in the share class that can invest up to 15% in private companies have seen gains of about 4.5%, after fees, for the period. The gains stand at 14% and 21% for clients in share classes that can invest up to 35% and 50% in private companies.
Meanwhile, Boston-based Whale Rock Capital Management was down 11.2% for its public investments in a hedge fund that can invest up to a quarter of its clients’ money in private companies, said people familiar with the fund. The performance of the fund’s private wagers shrank the fund’s losses to 3.3% for the year through September.
Hedge funds without private companies in their portfolios have had a rougher time. Palo Alto, Calif.-based Light Street Capital Management, which manages late-stage growth and other funds along with a hedge fund that only invests in public companies, is down 18.6% for the year through September in its hedge fund, said people familiar with the firm. That has brought the fund’s size down to about $1.7 billion. Its growth funds have fared much better, the people said, with Light Street’s first such fund, whose investments include the restaurant-software provider
expected to have an internal rate of return of more than 100%.
The rush into private investing by public-market investors has helped fuel surging valuations for private companies. And as hedge funds, along with mutual funds and sovereign-wealth funds, deploy billions of dollars, they often crowd out venture and growth funds.
Hedge funds made up 27% of the money raised in private rounds this year through June, despite participating in just 4% of the deals, according to a recent report by Goldman Sachs Group Inc.
“These tech companies are growing exponentially, and managers want to capture that huge exponential growth for their clients,” said Susan Webb, founder and investment chief at the New York-based outsourced-investment firm Appomattox Advisory.
The higher-return potential is stark. Private-equity and venture strategies gained an average 14.2% a year in the decade ended in 2020, Goldman said, while hedge funds overall averaged half those annual returns over the period—and were subject to the stresses of regular redemption cycles.
Toast, a restaurant-software provider that went public last month, is an investment of a Light Street Capital Management growth fund.
Photo:
Richard Drew/Associated Press
Hybrid funds can offer distinct benefits, said Udi Grofman, global co-head of the private-funds group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. “The beauty of the structure is that it allows the capital of the investors, in between being invested in private investments, to be exposed to public markets,” Mr. Grofman said. Clients typically sit on cash to fund capital calls by venture and private-equity funds.
Stock-picking hedge funds had a banner year in 2020, buoyed by markets that set new highs after bottoming that March.
Their fortunes in public markets have changed this year. The meme-stock rally in January, which sent the price of companies including GameStop Corp. and
to extraordinary heights, dealt losses to myriad hedge funds. Whale Rock gained 71% last year, while the D1 share class investing up to 15% of clients’ money in private companies climbed 60%; in January they lost about 11% and 30%, respectively, in just their public investments.
While D1 has almost recouped those losses, Whale Rock and other growth-oriented stock pickers have struggled. Fund managers say sector rotations that have alternately favored growth or value have made it difficult to navigate markets. Long out-of-favor sectors such as energy and financials have been on a tear.
Meanwhile, private markets have continued to be supportive. The U.S. IPO market is flourishing, and companies are continuing to raise more money in private markets than in the past. Hedge funds are contributing to the brisk pace of fundraising. D1 and Tiger Global Management, which manages a series of private-equity funds in addition to a hybrid hedge fund, have participated in private funding rounds this year through September at a pace of more than a deal a week for D1 and more than two deals every three days for Tiger, according to PitchBook Data Inc.
The 44-year-old Mr. Sundheim, who started D1 after several years as chief investment officer at Viking Global Investors, said at a recent capital-introduction conference that he hadn’t expected to get as big in private companies as he has. D1 is invested in 90 private companies, he said.
He said judgment was the only competitive advantage in public markets as private markets offered the additional benefit of firms’ reputations playing a role in gaining access to deals. He said D1 in its earliest investments acted as a resource to management teams so they would be strong references for D1. Mr. Sundheim also said he was confident in his portfolio of public investments over the next three to five years.
bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.
In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”
It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.
The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.
Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.
Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.
The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.
& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.
The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.
Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.
Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like
Wednesday night, as bankers met with Robinhood Chief Executive
Vlad Tenev
to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.
A Robinhood IPO event in Times Square.
An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.
The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.
Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday.
The shares fell further still Friday morning before regaining some ground in the early afternoon.
The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ
In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.
On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.
Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”
Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.
Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.
For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.
In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.
Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:
One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.
Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.
In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.
bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.
However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.
Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.
How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.
Every once in a while, outside investors in a brokerage IPO do well.
began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.
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Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.
That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.
That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”
The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ
under the direct management of its famous founder turned out to be a bit of a letdown. Revenue and operating income for the second quarter both fell shy of Wall Street’s estimates, as did the high end of the company’s revenue forecast for the current quarter. It was the first time the e-commerce titan missed the high end of its own sales projections in two years, according to data from FactSet.
The company is still a juggernaut. Second-quarter revenue rose 27% to $113.1 billion, bringing trailing 12-month sales to more than $443 billion. That puts Amazon well on pace to overtake
as the largest U.S. company by annual sales some time next year, while still growing at double-digit rates. Growth at the company’s crucial AWS cloud business also picked up, with revenue jumping 37% year over year compared with a 32% rise in the last quarter. That lines up with trends shown by cloud rivals
and Google earlier this week, suggesting that the market leader, AWS, is at least holding its ground.
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But the boom in online sales Amazon enjoyed at the start of the pandemic created a challenging comparison for the most recent quarter. Thursday’s results confirmed the suspicions of some analysts that the company’s Prime Day sales event in late June underwhelmed. Amazon’s online stores segment saw revenue grow by only 16% to $53.2 billion in the second quarter, falling well short of analysts’ targets. Revenue growth from third-party and subscription services decelerated. Advertising revenue, reflected in the company’s “Other” segment, showed a strong jump of 87% year over year to $7.9 billion. But advertising still contributes only about 7% to Amazon’s total revenue.
The results create a bit more of a challenging setup for new CEO
Andy Jassy
as Amazon will face difficult comparisons for the rest of the year following its pandemic-fueled sales jump in 2020. But the bar seems low enough. The midpoint of the company’s revenue projection for the third quarter represents growth of 13% year over year. That would be Amazon’s slowest growth rate in 20 years, even with the pandemic picking back up and possibly driving more sales online.
