Three Things (9/4)

Wake me up when September ends

Wake me up when September ends,” sang the band Green Day—and many investors will feel the tune was written for them. September has been notoriously unkind to markets - check out the chart below with data going back to the 1800s. If the first day of trading this month is any indication of what’s to come, we may be in for a long ride. The S&P 500 ended the day down over 2% while the tech-heavy Nasdaq was down more than 3% as new economic data rekindled fears around the health of the economy.

Contrary to popular belief, it could be argued that investors are actually in a cheerful mood. Stocks coming off a strong August when a barrage of stronger-than-expected economic data eased worries about the health of the U.S. jobs market. The Federal Reserve is also expected to start cutting interest rates for the first time in four years when its next meeting concludes on Sept. 18, which could boost both stocks and bonds. Combine this with a “broadening rally” (i.e. themes that weren’t working are beginning to work again) and strong earnings, there’s reason to believe September can be constructive. At the end of the day, though, time will tell whether September can buck the unfortunate trend.

Market making it rain

Market-making giants Citadel Securities and Jane Street Group are on track for record annual revenue hauls as they further encroach on the big banks’ trading territory. First-half net trading revenue at Citadel rose 81% to $4.9 billion from the same period a year earlier while the same metric gained 78% to $8.4 billion at Jane Street. Although the companies are private, the figures are pulled from the required financial data recently disclosed to debt investors that lend to the two companies.

The numbers offer a rare glimpse behind the scenes of some of the highest performing institutions on Wall Street. What’s most staggering to us is the scale of the growth: by comparison, Wall Street’s biggest banks only saw an 18% bump in equities trading revenue compared to the market maker’s 81% and 78% gains. What’s even more impressive is that they’re doing this with around 3,000 employees (for context, Goldman has over 40,000). The market makers are lean machines, understand what they’re uniquely brilliant at, and clearly show zero signs of slowing down.

Life sciences property glut

Biotech and pharmaceutical buildings became one of the hottest investments in commercial property at the start of the pandemic. Now, the glut of life-sciences properties has gotten so bad that some developers are exploring the unthinkable: marketing the space for office use. Since the first quarter of 2020, more than 59 million square feet of new space has been added with an additional 19.1 million square feet in the pipeline, according to JLL. Making matters worse, demand is softening – many biotech and pharmaceutical companies have lost their appetites for rapid expansion because of high interest rates, weak venture-capital financing and an uncertain economy.

Real estate is a highly cyclical sector and the ‘ponds to which investors fish’ couldn’t be more important here. Not all real estate investments look the same and the timing for entry in real estate subsectors can make or break returns. This is the age-old story of real-estate developers over-responding and it could take years to see the downstream impacts completely unfold.

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