Trends We're Tracking: Student debt, work stoppages, U.S. dollar, and IPOs

Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.

Student debt resumes

October is the month that student debt loan payments will resume. Student loans have been in forbearance since the beginning of the pandemic in March of 2020. The nearly 43 million borrowers of around $1.6 trillion will likely see a payment resume in some form. This new burden will hit discretionary budgets of borrowers and have effects throughout the economy. 

Good news comes in the form of payment plans, created by the Biden Administration, that will see some low earners ($32,800 a year or less) exempt from payments. There are also other options for a delay in payments like military deferment or the continuation of current schooling for many borrowers.¹ However, the effect of these payment plans on the economy will be hard to measure and the overall impact might not be significant, potentially helping the Fed in their mandate to curb inflation.

Work stoppages on the rise 

The U.S. has seen a spike in work stoppages—a recent report shows that there were 4.1 million days of work lost over the month of August, the highest level in nearly 25 years. Much of the days lost was the result of strikes by Hollywood actors and writers, which has now been resolved. However, labor activism continues to rise as the United Auto Workers (UAW) announced strikes at three factories, one at each of the largest car manufacturers, General Motors, Ford, and Stellantis. The targeted work stoppages account for nearly 9% of the companies’ North American production. Strikes began as negotiation between the UAW and management failed. Workers are demanding a 40% wage increase over 4 years, cost of living adjustments, and retiree medical benefits.^2,3 While the ongoing negotiations are largely focusing on pay and benefits, there is a deeper issue at hand. Car manufacturers are investing billions of dollars to develop electric vehicles (EV) and plan to move away from combustion engines. This change poses big risks to auto workers and the unions, as EVs have fewer parts and can be made with less workers. As the EV revolution accelerates, auto workers and unions worry about securing their place in the future.⁴

The strengthening dollar

Driven primarily by diverging monetary policies, the U.S. dollar rose sharply versus most other major currencies in September. The Fed, ECB, and BOE all announced their policy rate decisions and issued their policy guidance during the month, with the Fed being the most hawkish. The Fed’s action can be best characterized as hawkish pause—while it kept its policy rate unchanged, it maintained its restrictive bias. The ECB’s action can be best described as dovish pause—not only did it keep its policy rate unchanged, it also signaled potential easing. And the BOE’s action can be best depicted as a dovish hike—although it raised its policy rate, it hinted that this might be the last rate hike.⁵

With the September jump, the dollar index has risen more than 7% since its bottom in mid-July. While strong dollar helps to contain inflation, it hurts earnings of U.S. companies with international businesses. Along with surging bond yields and energy prices, the strong dollar adds to the tightness of financial conditions.

The IPO and M&A space sees some green shoots in September

A flurry of IPOs that grabbed investor attention brought some life back to the primary issuance market, where activity has been subdued since January 2022. British chip designer, Arm Holdings; grocery delivery technology company, Instacart; and provider of e-commerce marketing automation, Klaviyo, pushed the September U.S. IPO volume to north of $7 billion. Floats for these IPOs were less than 10%, and this was lower than the average IPO float of 18-19% seen in 2021 and 2022. Moreover, the valuations they were seeking in the public markets were much lower than their 2021 private market values. The prices of these stocks have since plateaued after an initial surge on listing day.^6,7,8,9

The M&A space also got a big boost as Cisco Systems announced its decision to acquire Splunk in a $28 billion mega deal as it tries to diversify away from hardware revenues to subscription-based software revenues.¹⁰ The deal is happening at a time when M&A activity has slumped, especially within the technology sector, thus paving the way for increased expectations regarding similar deals involving subscription software.

Sources:

¹https://www.economist.com/finance-and-economics/2023/09/14/the-resumption-of-student-loan-payments-will-hit-american-growth 
²https://www.wsj.com/business/autos/uaws-strike-strategy-start-small-and-keep-em-guessing-5facd690
³https://www.wsj.com/business/the-u-s-lost-4-1-million-days-of-work-last-month-to-strikes-92c6a9f7
⁴https://www.nytimes.com/2023/09/16/business/electric-vehicles-uaw-gm-ford-stellantis.html
⁵https://www.wsj.com/finance/currencies/dollars-resurgence-is-a-headache-for-the-rest-of-the-world-608e2f95 
⁶https://www.cnbc.com/2023/09/20/instacart-loses-almost-all-its-ipo-gains-by-second-day-on-nasdaq.html 
⁷https://www.cnbc.com/2023/09/20/klaviyo-shares-open-at-36point75-in-nyse-debut.html 
⁸https://www.barrons.com/articles/instacart-stock-ipo-low-float-92147c93 
⁹https://www.ft.com/content/2b8f723d-52b0-4ea5-9703-7c65e3c6bd35 
¹⁰https://www.reuters.com/markets/deals/ciscos-28-billion-splunk-deal-may-ignite-software-deal-frenzy-2023-09-26/