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    Stock Markets Off to Worst Start Since 2016 as Fed Fights Inflation

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    Stocks are off to their worst start of a year since 2016 as the central bank pulls back the enormous stimulus programs it began in the early months of the pandemic.After falling for a fourth day in a row on Friday, the stock market suffered its worst week in nearly two years, and so far in January the S&P 500 is off to its worst start since 2016. Technology stocks have been hit especially hard, with the Nasdaq Composite Index dropping more than 10 percent from its most recent high, which qualifies as a correction in Wall Street talk.That’s not all. The bond market is also in disarray, with rates rising sharply and bond prices, which move in the opposite direction, falling. Inflation is red hot, and supply chain disruptions continue.Until now, the markets looked past such issues during the pandemic, which brought big increases in the value of all kinds of assets.Yet a crucial factor has changed, which gives some market watchers reason to worry that the recent decline may be consequential. That element is the Federal Reserve.As the worst economic ravages of the pandemic appear to be waning, at least for now, the Fed is ushering in a return to higher interest rates. It is also beginning to withdraw some of the other forms of support that have kept stocks flying since it intervened to save desperately wounded financial markets back in early 2020.This could be a good thing if it beats back inflation without derailing the economic recovery. But removing this support also inevitably cools the markets as investors move money around, searching for assets that perform better when interest rates are high.“The Fed’s policies basically got the current bull market started,” said Edward Yardeni, an independent Wall Street economist. “I don’t think they are going to end it all now, but the environment is changing and the Fed is responsible for a lot of this.”The central bank is tightening monetary policy partly because it has worked. It helped stimulate economic growth by holding short-term interest rates near zero and pumping trillions of dollars into the economy.This flood of easy money also contributed to the rapid rise in prices of commodities, like food and energy, and financial assets, like stocks, bonds, homes and even cryptocurrency.What happens next comes from an established playbook. As William McChesney Martin, a former Fed chairman, said in 1955, the central bank finds itself acting as the adult in the room, “who has ordered the punch bowl removed just when the party was really warming up.”The mood of the markets shifted on Jan. 5, Mr. Yardeni said, when Fed officials released the minutes of their December policymaking meeting, revealing that they were on the verge of embracing a much tighter monetary policy. A week later, new data showed inflation climbing to its highest level in 40 years.Putting the two together, it seemed, the Fed would have no choice but to react to curb rapidly rising prices. Stocks began a disorderly decline.Financial markets now expect the Fed to raise its key interest rate at least three times this year and to start to shrink its balance sheet as soon as this spring. It has reduced the level of its bond buying already. Fed policymakers will meet next week to decide on their next steps, and market strategists will be watching.Low interest rates made certain sectors especially appealing, foremost among them tech stocks. The S&P 500 information technology sector, which includes Apple and Microsoft, has risen 54 percent on an annualized basis since the market’s pandemic-induced trough in March 2020. One reason for this is that low interest rates amplify the value of the expected future returns of growth-oriented companies like these. If rates rise, this calculus can change abruptly.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    A Fed Official’s 2020 Trade Drew Outcry. It Went Further Than First Disclosed.

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    Corrected disclosures show that Vice Chair Richard H. Clarida sold a stock fund, then swiftly repurchased it before a big Fed announcement.Richard H. Clarida, the departing vice chair of the Federal Reserve, failed to initially disclose the extent of a financial transaction he made in early 2020 as the Fed was preparing to swoop in and rescue markets amid the unfolding pandemic.Mr. Clarida previously came under fire for buying shares on Feb. 27 in an investment fund that holds stocks — one day before the Fed chair, Jerome H. Powell, announced that the central bank stood ready to help the economy as the pandemic set in. The transaction drew an outcry from lawmakers and watchdog groups because it put Mr. Clarida in a position to benefit as the Fed restored market confidence.Mr. Clarida’s recently amended financial disclosure showed that the vice chair sold that same stock fund on Feb. 24, at a moment when financial markets were plunging amid fears of the virus.The Fed initially described the Feb. 27 transaction as a previously planned move by Mr. Clarida away from bonds and into stocks, the type of “rebalancing” investors often do when they want to take on more risk and earn higher returns over time. But the rapid move out of stocks and then back in makes it look less like a planned, long-term financial maneuver and more like a response to market conditions.“It undermines the claim that this was portfolio rebalancing,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. “This is deeply problematic.”The Fed did not provide further explanation of Mr. Clarida’s trade when asked why he had sold and bought in quick succession. Asked if the Fed stood by previous indications that the move was a rebalancing, a spokesperson did not comment.The correction to the disclosures was released late last month and came after Mr. Clarida noticed “inadvertent errors” in his initial filings, a Fed spokesperson said, noting that the holdings were in broad funds (as opposed to investing in individual stocks). Mr. Clarida did not comment for this article.The extent of Mr. Clarida’s transaction is the latest development in a monthslong trading scandal that has embroiled top Fed officials and prompted high-profile departures at the usually staid central bank.Financial disclosures released in late 2021 showed that Robert S. Kaplan, the former Federal Reserve Bank of Dallas president, had made big individual-stock trades, while Eric S. Rosengren, the Boston Fed president, had traded in real estate securities. Those moves drew immediate and intense backlash from lawmakers, ethics experts and former Fed employees alike.That’s because Fed officials were actively rescuing a broad swath of markets in 2020: In March and April, they slashed rates to zero, bought mortgage-tied and government bonds in mass quantities, and rolled out rescue programs for corporate and municipal debt. Continuing to trade in affected securities for their own portfolios throughout the year could have given them room to profit from their privileged knowledge. At a minimum, it created an appearance problem, one that Mr. Powell himself has acknowledged.Mr. Kaplan resigned in September, citing the scandal; Mr. Rosengren resigned simultaneously, citing health issues. Mr. Clarida’s term ends at the close of this month, which it was scheduled to do before news of the scandal broke.Mr. Clarida’s trades, which Bloomberg reported earlier, also raised eyebrows among lawmakers, including Senator Elizabeth Warren of Massachusetts, who has demanded a Securities and Exchange Commission investigation into Fed officials’ 2020 trading. But many ethics experts had seen the transaction as more benign, if poorly timed, because it happened in a broad-based index and the Fed had said it was part of a planned and longer-term investment strategy.The new disclosure casts doubt on that explanation, given that Mr. Clarida sold out of stocks just days before moving back into them.“It’s peculiar,” said Norman Eisen, an ethics official in the Obama White House who said he probably would not have approved such a trade. “It’s fair to ask — in what respect does this constitute a rebalancing?”It is unclear whether Mr. Clarida benefited financially from the trade, but it was most likely a lucrative move. By selling the stock fund as its value began to plummet and buying it back days later when the price per share was lower, Mr. Clarida would have ended up holding more shares, assuming he reinvested all of the money that he had withdrawn. The financial disclosures put both transactions in a range of $1 million to $5 million.The sale-and-purchase move would have made money within a few days, as stock markets and the fund in question increased in value after Mr. Powell’s announcement. The investment would have then lost money as stocks sank again amid the deepening pandemic crisis.But the fund’s value recovered after the Fed’s extensive interventions in markets. Assuming they were held, the holdings would ultimately have appreciated in value and turned a bigger profit than they would have had Mr. Clarida merely held the original investment without selling or buying.The Fed was aware of the reputational risk around trading as the pandemic kicked into high gear — the Board of Governors’ ethics office sent an email in late March 2020 encouraging officials to hold off on personal trades — but notable transactions happened in late February and again as early as May in spite of that, its officials’ disclosures suggest.Mr. Powell has acknowledged the optics and ethics problem the trading created, saying that “no one is happy” to “have these questions raised.” He and his colleagues moved quickly to overhaul the Fed’s trading-related rules after the revelations, releasing new and stricter ethics standards that will force officials to trade less rapidly while banning many types of investment.The individuals in question also faced censure. They are under independent investigation to see if their transactions were legal and consistent with internal central bank rules. The S.E.C. declined to comment on whether it has opened or will open an investigation into Mr. Clarida’s trades and his colleagues’, as Ms. Warren had requested.While the officials who came under the most scrutiny for their trades have left or will leave soon, the new disclosure could cause problems for the Fed’s remaining leaders — including Mr. Powell, whom President Biden recently renominated to a second term as chair.Mr. Powell will appear before the Senate Banking Committee next week for his confirmation hearing, as will Lael Brainard, a Fed governor, whom Mr. Biden nominated to replace Mr. Clarida as vice chair.Both could face sticky questions about why a Fed culture permissive of trading at activist moments was, until recently, allowed to prevail. Mr. Powell led the organization, while Ms. Brainard headed the committee in charge of reserve bank oversight.Jerome H. Powell and his colleagues moved quickly to overhaul the Fed’s trading-related rules after the revelations.Stefani Reynolds for The New York TimesThe trading scandal has also resurfaced longstanding concerns about whether the Fed is too cozy with Wall Street, and whether its officials are working for the public or to profit from their own actions.If he is asked about the scandal, Mr. Powell is likely to point to the tougher ethics guidelines that the Fed unveiled in October. Mr. Clarida’s apparently rapid transaction would most likely have been trickier under the new rules, which require officials to give 45 days’ notice before buying an asset, and which prevent trading during tumultuous market periods.The updated disclosures do show that Mr. Clarida was “in compliance with applicable laws and regulations governing conflicts of interest,” based on the Fed ethics officer’s assessment. But that alone is unlikely to prevent scrutiny.Regardless of legality, “the public would be concerned if it turned out that he bought shares of the fund before a major announcement by the Federal Reserve potentially affecting the value of his shares,” Walter Shaub, a former government ethics official now at the Project on Government Oversight, said in an email.Mr. Shaub said more information was needed to know if the trade was problematic, including whether Mr. Clarida knew the Feb. 28 announcement was coming — and when he knew that.The Fed previously told Bloomberg that Mr. Clarida was not yet involved in deliberations about the coronavirus response at the time of the trade.But Mr. Clarida was in close touch with his colleagues throughout that week. He had a call with a board member and a regional Fed president on Feb. 26, his calendars show. That is the way the Fed typically lists meetings of the Fed chair, vice chair and New York Fed president — the Fed’s so-called troika, which sets the agenda for central bank policy — on its largely anonymized official calendars.Mr. Conti-Brown said that regardless of how much Mr. Clarida knew about his colleagues’ plans, the February trades were an issue that the Fed needed to explain in detail.“Richard Clarida is a decision maker,” he said. “The deliberations that happen within his brain are what matter here.” More

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    Daimler Truck, a Spinoff From Mercedes-Benz, Starts Trading

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    Daimler’s car and truck divisions concluded an amicable divorce on Friday when shares in Daimler Truck began trading separately on the Frankfurt stock exchange.The separation of Mercedes-Benz, the luxury carmaker, from Daimler Truck, which owns Freightliner in the United States, signaled the end of an era not only for Daimler but also the German economy.The spinoff, announced in February, was the final chapter in a transition that began in the 1990s, when Daimler was a sprawling conglomerate that also made trains and passenger aircraft. Along with other industrial empires like Siemens, Daimler has been forced to jettison excess baggage to remain competitive.For car and truck makers, the need to ditch unwieldy corporate structures has become even more urgent as they try to survive the shift to emission-free propulsion. One justification for the spinoff is that it will allow Daimler Truck’s managers to make decisions more quickly.Daimler Truck is betting on hydrogen fuel cells for long-haul trucks, in contrast to competitors like Scania that favor batteries. It is not yet clear which technology will prevail.A few decades ago, many German companies operated on the principle that bigger was better. That might have made sense when capital was harder to come by, said Martin Daum, the chief executive of Daimler Truck, because the more profitable parts of a conglomerate could generate cash for struggling units.“We had globally very inefficient capital markets,” Mr. Daum said in an interview. “That supported the buildup of conglomerates.”“Today, every business that has a compelling idea can raise money,” he said.Whether Daimler Truck has compelling ideas will now be put to the test. The shares opened Friday at 28 euros (about $31.60) and rose as much as 8.5 percent, valuing the company at about $27 billion.The new company is the largest truck maker in the United States by way of its Freightliner brand. Globally, Daimler Truck is also the largest maker of buses. Its other brands include Mercedes-Benz trucks and buses sold primarily in Europe and Fuso trucks sold in Asia.Daimler Truck and Mercedes-Benz luxury cars will remain closely connected. Daimler, the parent company of Mercedes, will retain a 35 percent stake in Daimler Truck. The remaining shares will be distributed to Daimler shareholders.BNP Paribas, Citigroup and Goldman Sachs are serving as listing agents for the spinoff. More

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    Fed Warns Meme Stocks Could Pose Some Risks

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    Stocks that experience major volatility as a result of social media attention — often called meme stocks — have not threatened broader financial stability so far but could open the door to vulnerabilities, the Federal Reserve said in a report on Monday.The Fed’s twice-yearly update on America’s financial system included a special section on the meme stock phenomenon. It attributed the trend, in which attention on Twitter, Reddit and other platforms encourages rapid inflows into or out of buzzy stocks, to new trading technologies including mobile apps and to changing demographics, as younger people enter the retail trading market.“Along with the rise in risk appetite and the growing share of younger retail investors, access to retail equity trading opportunities has expanded over the past decade,” the report said.Social media can pump up interest in stocks, and it can also create an echo chamber, one in which “investors find themselves communicating most frequently with others with similar interests and views, thereby reinforcing their views, even if these views are speculative or biased.”Still, internet-inspired pile-ons do not necessarily create conditions that will spur a broad market crash, the Fed’s report suggested.“To date, the broad financial stability implications of changes in retail equity investor characteristics and behaviors have been limited,” the Fed said. The central bank specifically assessed what happened to shares of AMC Entertainment and GameStop in January, noting that activity and volatility in those stocks came alongside high activity on Twitter.While the report concluded that “recent episodes of meme stock volatility did not leave a lasting imprint on broader markets,” the Fed said a few trends “should be monitored.”The report pointed out that young and debt-laden investors may be more vulnerable to stock price swings, especially since they are now using “options,” which allow traders to place bets on whether prices will rise or fall and which can magnify leverage and potential losses.The Fed also warned that “episodes of heightened risk appetite may continue to evolve with the interaction between social media and retail investors and may be difficult to predict,” and that financial firms may not have calibrated their risk-management systems to reflect the volatility and losses that meme stock episodes might trigger.“More frequent episodes of higher volatility may require further steps to ensure the resilience of the financial system,” it said.Looking across a broader range of asset classes and recent trading activity, the Fed’s financial stability analysis generally suggested that the vulnerabilities have moderated compared with earlier in the pandemic — but it did flag high asset prices and a number of lingering risks.Stock prices have increased “notably,” the report said, and prices relative to forecast earnings remain near historical highs. Home prices have climbed, it noted, though mortgage lending standards have not deteriorated too badly. When lenders start to lower their standards, that can make the market more vulnerable.The Fed noted that “corporate bond issuance remained robust, supported by low interest rates,” also pointing out that “across the ratings spectrum, the composition of newly issued corporate bonds has become riskier.”And while many markets show signs of investor optimism, some financial strains from the pandemic shock persist.Some commercial real estate sectors continue to face challenges because “office vacancies are elevated and hotel occupancy rates remain depressed,” the report noted. Plus, “structural vulnerabilities persist in some types of money market funds,” which could amplify a future shock to the system.Money market mutual funds melted down during the pandemic and required a Fed rescue for the second time in a dozen years, and regulators are now looking at how to make them more resilient.The report also warned that life insurers might struggle to raise cash in a pinch.And it delved into climate risks. The central bank is among regulators now trying to understand what risks climate change might pose to banks, insurers and the broader financial system.“The Federal Reserve is developing a program of climate-related scenario analysis,” the report noted. “The Federal Reserve considers an effective scenario analysis program, which is designed to be forward looking over a period of years or decades, to be separate from its existing regulatory stress-testing regime.” More

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    Stocks Hit a Record as Investors See Progress Toward a Spending Deal

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    After weeks of fluctuations driven in part by Washington gridlock, share prices hit another high and put a dismal September in the rearview mirror.Wall Street likes what it’s hearing from Washington lately.The S&P 500 inched to a new high on Thursday, continuing a rally aided by signs of progress in spending talks that could pave the way for an injection of some $3 trillion into the U.S. economy.The index rose 0.3 percent to 4,549.78, its seventh straight day of gains and a fresh peak after more than a month of volatile trading driven by nervousness over the still-wobbly economic recovery and policy fights in Washington.The S&P 500’s performance this year

    Source: S&P Dow Jones IndicesBy The New York TimesBut even baby steps by lawmakers have helped end a market swoon that began in September.Share prices began to rise this month when congressional leaders struck a deal to allow the government to avoid breaching the debt ceiling, ending a standoff that threatened to make it impossible for the country to pay its bills. The rally has gained momentum as investors and analysts grow increasingly confident about a government spending package using a recipe Wall Street can live with: big enough to bolster economic growth, but with smaller corporate tax increases than President Biden’s original $3.5 trillion spending blueprint.“It seems like we’re kind of reaching a middle ground,” said Paul Zemsky, chief investment officer, multi-asset strategies at Voya Investment Management. “The president himself has acknowledged it’s not going to be $3.5 trillion, it’s going to be something less. The tax hikes are not going to be as much as the left really wanted.”Share prices had marched steadily higher for much of the summer, hitting a series of highs and cresting on Sept. 2. But a number of anxieties sapped their momentum as the certainty that markets crave began to evaporate. Gridlock over government spending, continuing supply chain snarls, higher prices for businesses and consumers and the Federal Reserve’s signals that it would begin dialing back its stimulus efforts all helped sour investor confidence. The S&P 500’s 4.8 percent drop in September was its worst month since the start of the pandemic.It has made up for it in October, rising 5.6 percent this month. But it’s not just updates out of Washington that have renewed investors’ optimism.The country has seen a sharp drop in coronavirus infections in recent weeks, raising, once again, the prospect that economic activity can begin to normalize. And the recent round of corporate earnings results that began in earnest this month has started better than many analysts expected. Large Wall Street banks, in particular, reported blockbuster results fueled by juicy fees paid to the banks’ deal makers, thanks to a surge of merger activity.Elsewhere, shares of energy giants have also buoyed the broad stock market. The price of crude oil recently climbed back above $80 a barrel for the first time in roughly seven years, translating into an instant boost to revenues for energy companies.But the recent rally seemed find its footing two weeks ago. On Oct. 6, word broke that Senator Mitch McConnell of Kentucky, the Republican leader, was willing to offer a temporary reprieve allowing Congress to raise the debt ceiling. The market turned on a dime from its morning slump, finishing the day in positive territory. That week turned out to be the market’s best since August.Once done as a matter of course in Washington, raising the debt ceiling has been an increasingly contentious issue in recent years — with sometimes serious implications for the market. In August 2011, a rancorous battle over the debt ceiling sent share prices tumbling sharply as investors began to consider the prospect that the United States could actually default on its debts.But the recent deal on the ceiling — even though it only pushed a reckoning into December — suggested to investors that there’s little appetite in Washington for a replay of a decade ago.“I think that let some pressure out of the system,” said Alan McKnight, chief investment officer of Regions Asset Management. “What it signaled to the markets was that you can find some area of agreement. It may not be very large. But at least they can come together.”With the impasse broken, the rally gained strength. Last Thursday, the S&P 500 jumped 1.7 percent — its best day in roughly seven months — as financial giants like Morgan Stanley and Bank of America reported stellar results.Potential progress on a deal in Washington has only brightened investors’ outlook.“Democrats are now moving in the same direction, and hard decisions are being made,” wrote Dan Clifton, an analyst with Strategas Research, who monitors the impact of policy on financial markets, in a note to clients on Wednesday.Understand the U.S. Debt CeilingCard 1 of 6What is the debt ceiling? More

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    Fed Ethics Office Warned Officials to Curb Unnecessary Trading During Rescue

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    Months later, some Federal Reserve leaders resumed their market activity, stoking a scandal now engulfing the central bank.On March 23 last year, as the Federal Reserve was taking extraordinary steps to shore up financial markets at the onset of the pandemic, the central bank’s ethics office in Washington sent out a warning.Officials might want to avoid unnecessary trading for a few months as the Fed dived deeper into markets, the Board of Governors’ ethics unit suggested in an email, a message that was passed along to regional bank presidents by their own ethics officers.The guidance came just as the Fed was unveiling a sweeping rescue package aimed at backstopping or rescuing markets, including those for corporate bonds and midsize-business debt. It appears to have been heeded: Most regional presidents and governors of the Fed did not engage in active trading in April, based on their disclosures.But the recommendation, which was confirmed by a person who saw the email, did not go far enough to prevent a trading scandal that is now engulfing the Fed and being leveraged against its chair, Jerome H. Powell, as the White House mulls whether to reappoint him before his leadership term expires early next year.The email could pose further trouble for the Fed, which declined to provide a copy, because it shows that central bank ethics officers — and officials in general — were aware that active trading could look bad when the Fed was taking emergency action to try to save markets and its policymakers had vast access to sensitive information. Despite the early warning, some top officials resumed trading after the most proactive phase of the Fed’s rescue ended, based on financial disclosures and background comments from regional bank spokespeople.Financial disclosures, first reported by The Wall Street Journal, showed that Robert S. Kaplan traded millions of dollars’ worth of individual stocks last year while he was head of the Federal Reserve Bank of Dallas. No dates are provided for those purchases and sales, but a Dallas Fed spokesman has said they did not take place between late March and the end of April.Another Fed official, Eric S. Rosengren, bought and sold securities tied to real estate while running the Federal Reserve Bank of Boston. Such securities are sensitive to Fed policy, and involve a market that Mr. Rosengren himself warned about in public speeches last year. His trading resumed in May, his disclosures show.Both Mr. Kaplan and Mr. Rosengren have since resigned from their positions, with Mr. Kaplan saying he did not want controversy around his transactions to distract from the Fed’s work and Mr. Rosengren citing health issues.Robert S. Kaplan traded millions of dollars’ worth of individual stocks while president of the Federal Reserve Bank of Dallas last year.Richard Drew/Associated PressWhile attention to the Fed’s ethics rules — and trading habits — started with its 12 regional branches, journalists and academics have begun to re-examine previously reported trades by Fed officials who sit on its board in Washington.Richard H. Clarida, the Fed’s vice chair, rebalanced a portfolio toward stocks in late February 2020, just before the Fed signaled that it stood ready to help markets and the economy in the face of the coronavirus pandemic. The timing has raised questions, though the transactions were in line with previous trading he had done. The vice chair has since said he has always acted “honorably and with integrity” while in public office.Mr. Powell also has faced backlash, primarily from progressives who do not want him reappointed, for selling holdings in a popular and broad stock index last October. The Fed was not rolling out new rescue programs at that time, and a spokeswoman has said Mr. Powell sold the holdings to pay for family expenses. Mr. Powell’s critics argue that he should not have made active financial transactions at all last year.As the ethics controversy swells, the Fed has been working to stem the fallout.Mr. Kaplan and Mr. Rosengren announced last month that they would step down, and Mr. Powell has said that “no one is happy” with the situation. He started a review of Fed ethics rules shortly after news of the presidents’ trading broke. He has also asked an independent watchdog to investigate the trades to make sure they complied with ethics rules and the law.But scrutiny has persisted, in part because Mr. Powell is up for reappointment.“It speaks to governance, incentives and general attitude,” said Simon Johnson, an economist at the Massachusetts Institute of Technology who previously wrote a post for Project Syndicate supporting Lael Brainard, a leading contender to replace Mr. Powell.Mr. Johnson, who does not personally know Ms. Brainard, a Fed governor, has been among those flagging Mr. Powell’s transaction to journalists. He has focused on the fact that Mr. Powell sold a stock-based fund while he was in regular contact with the Treasury secretary during an active year for the central bank, and said he thought the trading scandal should factor into the Fed chair’s reappointment chances.“Presumably, someone in the White House will pay attention and look at the details,” Mr. Johnson said.Lael Brainard, a Fed governor, is considered a leading contender to replace Mr. Powell as chair. Cliff Owen/Associated PressMr. Powell’s October transaction and the questions about it highlight that there is no time when Fed chairs can safely sell assets to raise cash should they need it, said Peter Conti-Brown, a professor and Fed historian at the University of Pennsylvania. That reinforces the need to update the Fed’s rules to eliminate any appearance of conflict by taking discretion away from officials, he said.“It’s hard for me to fault him that he did it when he did it,” Mr. Conti-Brown said, later adding that “it would be more a scandal for this trade to end Chair Powell’s career as a central banker.”The board’s March 23 guidance appears to have had some effect, because central bank officials overall conducted little or no active trading during the period last year when they were most active in markets, in March and April.Mr. Powell’s only dated transactions came in September, October and December. Mr. Clarida’s came in February and August. Ms. Brainard did not report any transactions last year.Randal K. Quarles, the Fed’s vice chair for supervision at the time, is shown to have bought a financial stake in a fund in early April; a family trust that his wife has an interest in bought an interest in a fund, which the couple sold before the fund purchased any securities, a Fed spokesperson said. Michelle Bowman, a Fed governor, noted a small sale in mid-April. That came from a retirement fund held in her spouse’s health savings account, and reflected the account’s closing as her husband changed jobs, a Fed spokesman said.At the regional banks, the heads in San Francisco, Minneapolis, Chicago, St. Louis and Kansas City, Mo., noted no disclosures or only college savings plan and retirement contributions last year. John C. Williams, the president of the powerful New York Fed, reported one personal transaction in December.The Fed president in Richmond, Va., reported private equity and bond transactions in July and August, and the Atlanta Fed president helped buy a property in Utah in June. The Cleveland Fed president reported buying index fund shares in February, but then stopped until November.The Philadelphia Fed president made several relatively small transactions throughout April and the year, but a spokeswoman for his bank said the spring trades were not active. They involved an automatic liquidation from a legacy fund that occurs every year, an automatic dividend reinvestment and a bond call.The fact that trading more or less halted last spring is a silver lining, Mr. Conti-Brown said. Regional reserve banks are quasi-private institutions, so it is not unambiguously clear that they must listen to the Board of Governors on such matters.“This tells us that the board’s ability to oversee ethics in the system is there,” he said. “What is missing is a better set of rules.” More

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    Economic and Earnings Concerns Begin to Weigh on Stocks

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    After having few cares about the markets all year, investors are getting nervous as the Fed signals that harsher policies are on the way.Wall Street’s imperviousness to bad news, which enabled stocks to double in value from their pandemic panic lows, may be starting to crack.When the Federal Reserve signaled in September that it would soon tighten monetary policy by curtailing asset purchases, the stock market took it well, but not for long. The S&P 500 rose modestly for a few days before reversing course, pushing the index more than 5 percent below the high it set earlier in the month, which amounted to its biggest drop for the year.Despite that setback, the market managed to eke out a 0.2 percent gain for the third quarter.A stingier Fed is not the market’s only concern. Inflation, dismissed until recently by the Fed as a transitory artifact of the pandemic, is coming to be seen as more persistent as the prices of goods, services and labor increase. What is being acknowledged as transitory, though, is the jolt to economic growth and corporate profits provided by several trillion dollars of added spending by Congress.With a number of threats to prosperity becoming harder to ignore, many investment advisers have become less enthusiastic about stocks. They are revising return expectations down and recommending exposure only to narrow niches.“We’re not bullish today at all,” said David Giroux, head of investment strategy at T. Rowe Price. “What really drives the market is earnings growth,” he said. “We can’t repeat some of the things we’ve done this year. Earnings growth may slow in ’22, maybe dramatically.”After being a colossal boon for the economy, fiscal stimulus — in the form of enormous federal spending — may now prove to be three problems for the stock market in one. Government expenditure focused on the pandemic that boosted growth is ebbing. There is a broad consensus that taxes will rise soon to help pay for that spending. And, because many people took direct stimulus payments and invested them in the stock market, stocks ran up faster than they would otherwise.The positive effects of so much stimulus may have run their course, as domestic stock funds tracked by Morningstar lost 0.6 percent in the third quarter, with portfolios that focus on financial services among the few clear winners.The SPDR S&P 500 E.T.F. Trust, which tracks the index and is the largest exchange-traded fund, returned 0.6 percent in the quarter, beating the average actively managed mutual fund.The very fact that many investors until lately have seemed untroubled by the perils facing the economy is what some find troubling.“There is complacency in a lot of things,” said Luca Paolini, chief strategist at Pictet Asset Management. He enumerated some of his worries: “‘Inflation is temporary.’ Maybe. Maybe not. Six months ago, consumption was booming. People had money and time. Now they have less money and less time. Earnings momentum has peaked, clearly, relative to six months ago. I’m concerned the market isn’t pricing in deterioration in the economic outlook.”By some measures, stocks are as expensive as at almost any time in history. The S&P 500 trades at about 34 times the last 12 months of earnings. Sarah Ketterer, chief executive of Causeway Capital Management, worries that corporate profits face numerous headwinds and that their impact on stocks could be especially high with valuations so rich.“Inflation is up, economic growth is down,” she said. “The supply chain disruption phenomenon is global, creating cost increases and margin pressure.” Companies in many industries have reported trouble sourcing some commodities and important components of manufactured goods, such as semiconductors, hindering production and making what they do produce more expensive.Rising prices have sent interest rates in the bond market higher, driving down bond prices and keeping a lid on bond funds in the third quarter. The average one rose 0.2 percent, dragged down by a 2.9 percent decline in emerging-market portfolios.“I’m hard pressed to find an area of costs that haven’t gone up, and this may continue for some time,” Ms. Ketterer said. “No one knows how long it will take to unravel the tangled supply chain situation.”The situation seems most tangled in Asia, where many raw and intermediate materials originate. China has been the source of several worrying recent events, including power cuts that have impeded manufacturing, and financial instability at the China Evergrande Group, a giant, heavily indebted developer.Some specialists in Asian markets see little chance of Evergrande’s woes spilling over to the wider Chinese financial system, let alone beyond. Matthews Asia, a mutual fund manager, said in a note to investors that mortgage lending standards in China are fairly tight, with large down payments required and the packaging of loans into securities sold to investors minimal.“Evergrande’s problems are unlikely to cause systemic problems and the likelihood of this devolving into a global financial problem is minuscule,” Matthews’s analysts said. But they added that restrictions could be placed on the property sector in coming quarters.Saira Malik, head of equities at Nuveen, an asset manager, likewise does not expect Evergrande to become a global problem, but she cautions that it is not China’s only problem.“The government is focusing on social issues, and some of that is leading to moderation in the growth rate” of China’s economy, she said. While more expansive central bank policies would be helpful, she added, “we think China could get worse before it gets better.”Funds that focus on Chinese stocks got worse in the third quarter, sinking 13.8 percent. International stock funds in general lost 2.9 percent.As prices and risks in stock markets at home and abroad rise, the opportunities for strong, relatively safe gains shrink.Mr. Giroux said he is “buying what the market is concerned about in the short term,” such as stocks in managed care providers, which are trading at a discount to the market because earnings growth has been subdued.He said he would avoid smaller companies, as well as companies that have benefited from fiscal stimulus programs, including automakers, heavy industrial companies and semiconductor manufacturers.Ms. Malik, who said she is “moderately bullish” overall, prefers smaller companies and European stock markets. She also likes makers of office software, such as Salesforce and HubSpot, and high-quality consumer cyclicals like Nike.Mr. Paolini also favors European stocks.“The case for Europe is quite solid,” he said. “Vaccination rates are high; the Covid story is over,” yet government stimulus continues across the region, so “they don’t have the same fiscal cliff as in the U.S. and U.K.”His other recommendations include financial stocks, which tend to benefit from higher interest rates, and drug makers.Ms. Ketterer thinks there is more potential for pandemic recovery stocks to appreciate. In particular, she expects Rolls-Royce, which makes jet engines, to benefit from an operational restructuring, and Air Canada, which cut costs during the pandemic and has a strong balance sheet and little competition, to do well as travel picks up.Ms. Ketterer remains resolute about trying to pick winners when there may not be many winners to pick.“What do we do?” she said. “We’re not going to hide. We don’t want to be in cash, and we don’t want to be in bonds if rates are rising.”Mr. Giroux said he doesn’t care much for bonds or cash — money-market funds — right now, either. He favors bank loans, floating-rate securities created by bundling loans that banks have made to corporate customers. They yield close to 4 percent, and that could increase if market interest rates rise. Default risk is mitigated because bank loans have a high place in corporate capital structures.The troubles in the stock market lately are barely a blip when viewed on a chart of the phenomenal last 18 months, so a single-digit percent return may seem meager. But it may start to look generous if the time has arrived for investors to learn to live with less.“The risk profile for equities over the next three to five years is not as good as it was a year ago because valuations are high, sentiment is good and earnings growth is likely to slow,” Mr. Giroux said. “We pull back on risk assets when things feel pretty good, and right now things feel pretty good.” More

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    Oil and Gas Prices May Stay High as Investors Chase Clean Energy

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    Even as more costly fuel poses political risks for President Biden, oil companies and OPEC are not eager to produce more because they worry prices will drop.HOUSTON — Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150 percent over the same time, threatening to raise prices of food, chemicals, plastic goods and heat this winter.The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to blackouts and long lines at filling stations.The situation in the United States is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply. He is doing so as he simultaneously pushes Congress to address climate change by moving the country away from fossil fuels toward renewable energy and electric cars.U.S. energy executives and the Wall Street bankers and investors who finance them are not doing anything to bolster production to levels that could bring down prices. The main U.S. oil price jumped nearly 3 percent on Monday, to about $78 a barrel, a seven-year high, after OPEC and its allies on Monday declined to significantly increase supply.Producers are still chafing at memories of the price crash early in the pandemic. Wall Street is even less enthusiastic. Not only have banks and investors lost money in the boom-bust cycles that whipsawed the sector over the past decade, but many also say they are prepared to pare their exposure to fossil fuels to meet the commitments they have made to fight climate change.“Everyone is very wary since it was just 15 or 16 months ago we had negative-$30-a-barrel oil prices,” said Kirk Edwards, president of Latigo Petroleum, which has interests in 2,000 oil and natural gas wells in Texas and Oklahoma. He was recalling a time of so little demand and storage capacity that some traders paid buyers to take oil off their hands.If the drillers don’t increase production, fuel prices could stay high and even rise. That would present a political problem for Mr. Biden. Many Americans, especially lower-income families, are vulnerable to big swings in oil and gas prices. And while use of renewable energy and electric cars is growing, it remains too small to meaningfully offset the pain of higher gasoline and natural gas prices.Goldman Sachs analysts say energy supplies could further tighten, potentially raising oil prices by $10 before the end of the year.That helps explain why the Biden administration has been pressing the Organization of the Petroleum Exporting Countries to produce more oil. “We continue to speak to international partners, including OPEC, on the importance of competitive markets and setting prices and doing more to support the recovery,” Jen Psaki, Mr. Biden’s press secretary, said last week.But OPEC and its allies on Monday merely reconfirmed existing plans for a modest rise in November. They are reluctant to produce more for the same reasons that many U.S. oil and gas companies are unwilling to do so.Oil executives contend that while prices may seem high, there is no guarantee that they will stay elevated, especially if the global economy weakens because coronavirus cases begin to increase again. Since the pandemic began, the oil industry has laid off tens of thousands of workers, and dozens of companies have gone bankrupt or loaded up on debt.Oil prices may seem high relative to 2020, but they are not stratospheric, executives said. Prices were in the same territory in the middle of 2018 and are still some ways from the $100-a-barrel level they topped as recently as 2014.Largely because of the industry’s caution, the nationwide count of rigs producing oil is 528, roughly half its 2019 peak. Still, aside from recent interruptions in Gulf of Mexico production from Hurricane Ida, U.S. oil output has nearly recovered to prepandemic days as companies pull crude out of wells they drilled years ago.Another reason for the pullback from drilling is that banks and investors are reluctant to put more money into the oil and gas business. The flow of capital from Wall Street has slowed to a trickle after a decade in which investors poured over $1.4 trillion into North American oil and gas producers through stock and bond issues and loans, according to the research firm Dealogic.“The banks have pulled away from financing,” said Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas oil and gas producer. The flow of money supplied by banks and other investors had slowed even before the pandemic because shale wells often produced a lot of oil and gas at first but were quickly depleted. Many oil producers generated little if any profit, which led to bankruptcies whenever energy prices fell.Companies constantly sold stock or borrowed money to drill new wells. Pioneer, for example, did not generate cash as a business between 2008 and 2020. Instead, it used up $3.8 billion running its operations and making capital investments, according to the company’s financial statements.Industry executives have come to preach financial conservatism and tell shareholders they’re going to raise dividends and buy back more stock, not borrow for big expansions. Mr. Sheffield said Pioneer now intended to return 80 percent of its free cash flow, a measure of money generated from operations, to shareholders. “The model has totally changed,” he said.Among oil executives, there are still vivid memories of the collapse in energy prices last year, as the pandemic curtailed commuting and travel.Tamir Kalifa for The New York TimesOil company shares, after years of declines, have soared this year. Still, investors remain reluctant to finance a big expansion in production.With oil and gas exploration and production businesses taking a cautious approach and returning money to shareholders, the first company “that deviates from that strategy will be vilified by public investors,” said Ben Dell, managing director of Kimmeridge, an energy-focused private equity firm. “No one is going down that path soon.”This aversion to expanding oil and gas production is driven in part by investors’ growing enthusiasm for renewable energy. Stock funds focusing on investments like wind and solar energy manage $1.3 trillion in assets, a 40 percent increase this year, according to RBC Capital.And the biggest investment firms are demanding that companies cut emissions from their operations and products, which is much harder for oil and gas companies than for technology companies or other service-sector businesses.BlackRock, the world’s largest asset manager, wants the businesses it invests in to eventually remove as much carbon dioxide from the environment as they emit, reaching what is known as net-zero emissions. The New York State Common Retirement Fund, which manages the pension funds of state and local government workers, has said it will stop investing in companies that aren’t taking sufficient steps to reduce carbon emissions.But even some investors pushing for emissions reductions express concern that the transition from fossil fuels could drive up energy prices too much too quickly.Mr. Dell said limited supply of oil and natural gas and the cost of investing in renewable energy — and battery storage for when the sun is not shining and the wind is not blowing — could raise energy prices for the foreseeable future. “I am a believer that you’re going to see a period of inflating energy prices this decade,” he said.Laurence D. Fink, chairman and chief executive of BlackRock, said this could undermine political support for moving away from fossil fuels.“We risk a supply crisis that drives up costs for consumers — especially those who can least afford it — and risks making the transition politically untenable,” he said in a speech in July.There are already signs of stress around the world. Europe and Asia are running low on natural gas, causing prices to rise even before the first winter chill. Russia, a major gas supplier to both regions, has provided less gas than its customers expected, making it hard for some countries to replace nuclear and coal power plants with ones running on gas.OPEC, Russia and others have been careful not to raise oil production for fear that prices could fall if they flood the market. Saudi Arabia, the United Arab Emirates, Russia and a few other producers have roughly eight million barrels of spare capacity.“The market is not structurally short on oil supply,” said Bjornar Tonhaugen, head of oil markets for Rystad Energy, a Norwegian energy consulting firm.Helima Croft, head of global commodity strategy at RBC Capital Markets, said she expected that OPEC and Russia would be willing to raise production if they saw the balance between supply and demand “tighten from here.”If OPEC raises production, U.S. producers like Mr. Edwards of Latigo Petroleum will be even more reluctant to drill. So far, he has stuck to the investment plans he made at the beginning of the year to drill just eight new wells over the last eight months.“Just because prices have jumped for a month or two doesn’t mean there will be a stampede of drilling rigs,” he said. “The industry always goes up and down.”Clifford Krauss reported from Houston, and Peter Eavis from New York. More