🎙️ Financial Supermarkets

📉 After a hot start to 2024, stocks have pulled back.

It’s a good time to point out that, on average, the S&P 500 experiences a 13% intra-year decline — including in positive years.

As the market commentator Mike Santoli points out, “The work of a pullback in a bull market is to unwind over-aggressive positioning, drain excess optimism, reset expectations, and take prices down to meet fundamental buyers’ conviction.”

Also, quick programming note: We're temporarily changing our newsletter schedule. Starting this week, you'll receive our updates four times a week: Monday, Wednesday, Friday, and Sunday.

This shift lets us focus on delivering higher-quality editions, cutting through daily market noise. Be sure to let us know what you think.

Happy Earth Day!

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• The giant funds that rule Wall Street

• Nike reverses course as innovation stalls

This, and more, in just 5 minutes to read.

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In The News

💸 Move Aside, Big Banks: Giant Funds Rule Wall Street

Step aside, big banks. Giant investment companies are reshaping Wall Street. Top firms now control assets that rival the economies of large countries. 

The firms are expanding into new business areas, challenging the dominance of traditional banks. Asset managers, both traditional and alternative, control about $43.5 trillion in assets, twice as much as the $23 trillion controlled by U.S. banks. 

• Consider: Blackstone manages more assets than the GDP (gross domestic product) of the Netherlands.

Rapid growth: Firms like Blackstone, Franklin Templeton, BlackRock, and KKR are growing rapidly and becoming more complex. They’re becoming financial supermarkets catering to institutions and the wealthy and middle-class investors, a huge chunk of the market. 

• Private equity has emerged as an All-Star player, producing more billionaires than any other industry. Private equity fund managers now occupy 41 spots on Forbes' U.S. billionaire list, making up 5.5% of all billionaires, up from 3% a decade ago.
  

• Credit post-2008 financial crisis regulations limiting bank activities and low-interest rates pushing investors towards managed funds.
  

• Traditional fund managers are also growing, though less. They face a key challenge: falling profitability due to lower fees. To counter this, some have hired alternative managers to boost profits.

Here come the feds: Regulatory scrutiny is increasing. The Securities and Exchange Commission (SEC) introduced new rules for private funds to increase investor disclosures and restrict side deals. Large fund managers could face regulations similar to large banks, as a reinstated Obama-era measure allows them to be considered systemically important institutions.

Why it matters:

Could the surge keep going? Probably. KKR’s CEO, a new Forbes billionaire, said this month that KKR will double the money it controls to $1 trillion by 2029. 

An untapped market: Only 2% of wealthy individuals invest in alternative funds, which could triple to 6% or 7% by 2027. 

• “Much of the future growth will be driven by individuals who don’t have the experience or professional staff to help them,” noted Neuberger’s CEO. He added that fund managers must educate new buyers and provide them with well-diversified products to reduce risk.

• Neuberger launched a product in 2021 that pools private funds and their investments, giving clients with low buy-ins a diversified portfolio. In the past 12 months, the firm has doubled its size to ~$1 billion. 

Bottom line: The asset management landscape is ballooning in size, wealth, and intricacy, reshaping Wall Street's traditional boundaries.

Read more

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🤔 How customer service got so bad

🏠 Luxury real estate prices hit a new record

💵 What’s driving the U.S. dollar’s rally

🎵 Taylor Swift’s new album breaks Spotify records with 300 million streams

👟 Nike Reverses Course After Innovation Stalls

“Just do it.” There’s never doubt about where that comes from: Nike. 

But one of humanity’s most iconic brands, globally recognized by a simple “Swoosh,” is reeling after years of stagnation, showing that even the best logo, marketing, and first-mover advantages don’t mean surefire success at the top. 

Nike CEO John Donahoe held a virtual all-hands meeting with over 20,000 employees, during which he acknowledged the company's underperformance and held himself accountable. This comes after the company announced a layoff of more than 1,600 employees. Other employees questioned his understanding of accountability, suggesting he take a CEO salary cut until things turn around. It’s not exactly pretty.

The big picture: Since the pandemic, Nike has fallen in its hallmark category, running, especially as brands like Hoka and New Balance gain ground (no pun intended).

• Nike focused on re-releasing older successful products and preparing for an e-commerce revolution that didn’t materialize. That prompted a decline in its innovative and edgy image.
  

• Sales for the last quarter were flat compared to a year earlier, and the company's shares have declined by 24% over the past year.
  

• Nike shares are up only ~7% over the past five years, underperforming the S&P 500 (~70%). 

By now, Nike was supposed to become a tech company closely connected to consumers through its apps, aiming to collect valuable shopper data. Yet that didn’t pan out: Software designed to help day-to-day operations, such as procurement and inventory management, and speed up digital sales is about three years behind schedule.

Other missteps include costly decisions to cut ties with longstanding retail partners like DSW and Urban Outfitters to focus on direct-to-consumer sales. 

In theory, that move could boost profitability and margins, but it created inventory problems. Now, Nike is seeking assistance from some of these stores to clear out excess inventory.

Why it matters:

The company's strategic shifts have sparked internal debates about its identity. 

Some employees feel that in its eagerness to boost digital sales, Nike has strayed from its core identity as a pioneer of cutting-edge footwear for serious athletes. That’s opened the door for competitors like On and Hoka, which have capitalized on Nike's missteps by focusing on innovation and risk-taking.

Those smaller brands also enjoy the benefits of being more nimble — risk-taking is easier when you’re in hyper-growth mode, not an established $140 billion behemoth like Nike.

As Nike’s chief design officer summed it all up: The company has spent too much time looking to its past. “If you drive a car just by looking in the rearview mirror, that’s not a good thing. The bigger opportunity is the windshield.”

Read more

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Quick Poll

On Friday, we asked: What’s your favorite mode of transportation for travel?

— Air travel led the way. One reader wrote in, “I'm still scared every time that I have to fly, but depending on distance, if needed, it is still a magical thing to fly. ”

— A close second: the old-fashioned road trip. “No stress about airports and delay, more relax, better view as you travel.” Another reply: “Hiking is our favorite method, but we do drive to get to the hikes.” A third: “Nothing like hitting the road, see places you've never been. Support some small businesses and get out in nature at State and National Parks.”

— As one couple put it: “We are retired. It is time to enjoy the journey.”

See you next time!

That's it for today on We Study Markets!

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