The Federal Reserve thinks catastrophe is coming for US businesses

This originally appeared in Insider’s 10 Things Before the Opening Bell newsletter.

Hello readers. Phil Rosen here, reporting from New York. As a financial journalist, I spend a lot of time seeing what people well smarter than me have to say about money, markets, and the economy.

One report, written by the Federal Reserve’s own economists, left me with not exactly an upbeat outlook. More on that below.

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1. Researchers at the US central bank just published a paper warning that a historic surge in the percentage of distressed American companies could worsen the fallout from the Fed’s inflation battle.

Plainly, they said high borrowing costs could cause a huge number of companies to crumble.

“The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s,” Ander Perez-Orive and Yannick Timmer wrote.

The Fed’s 10 consecutive interest rates — intended to quell historically high prices — threaten to hammer business investment, employment, and economic activity.

Now, the economists said, it’s possible that debt-ridden companies will avoid spending money on new developments or facilities, hiring, or production.

The full extent of the damage remains to be seen, but as of now, the central bank authors said about 37% of firms are in trouble.

That is, more than a third of companies could default in the coming months, thanks to tightening monetary policy.

Story continues

Pardon the jargon, but here’s how the researchers put it:

“Our hypothesis is that following a policy tightening, access to external financing deteriorates more for firms that are in distress than for healthy firms, while following a policy easing, external financing conditions do not change appreciably enough for the two groups of firms to trigger a differential response.”

Got it?

It’s okay, I didn’t either the first time around.

Basically, they are predicting that companies feel pain in times of policy tightening, especially those with weaker balance sheets to begin with.

But at the same time, loosening of policy doesn’t necessarily translate to smoother sailing in the same way.

What’s your outlook for the state of business activity in the US for the rest of the year? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.

In other news:

2. US stock futures fall early Wednesday, as traders brace for Fed Chair Jerome Powell to speak before a policy panel at the European Central Bank Forum. Check out the latest market moves.

3. Earnings on deck: BlackBerry, Bed Bath & Beyond, and more, all reporting.

4. A chief market strategist explained why a recession won’t hit anytime soon. She said investors should be focused on underperforming sectors right now instead of getting into hot tech stocks.

5. Ukrainian debt is now one of the hottest emerging market investments. Russian setbacks have lifted Kyiv’s economic prospects, Bloomberg data showed, with the country’s sovereign dollar bonds returning over 30% in the second quarter — and most of those gains have come this month.

6. Investors should monitor these bearish signals to stay ahead of a potential sell-off in the stock market. That’s according to Bank of America, which pointed to technical signals that are beginning to surface following the S&P 500’s recent rally. Full details.

7. The housing market is showing signs of a rebound. Home prices stabilized in April, CoreLogic data published Tuesday showed. These are the three cities that saw the biggest home price increases.

8. “Time to get greedy.” That’s what 35-year market veteran Kevin Rendino said about small stocks, which investors are avoiding like it’s 2008. He said this batch of names look set to soar as much as 800%. 

9. A 20-year fund manager shared the eight mega-trend stocks he’s betting on. These names look poised to take market share, he said — but these are the five names he’s shorting now.

10. Tesla’s best stock run since 2020 is being spoiled by Wall Street downgrades. Goldman Sachs, Morgan Stanley, and Barclays have all warned that Elon Musk’s EV-maker could see its shares slide soon, as it could be overvalued following its latest rally. See the numbers.

Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.

Read the original article on Business Insider