The IPO market's soft opening

- The costs of a US government shutdown # # --------------------------------------------------------------- The key takeaways today: - How US consumers and companies are weathering higher rates - The IPO market's soft opening - How much does a shutdown cost the US economy? - Bond markets are grappling with rising government debt levels - PayPal's CEO sees cracks in consumers' finances - Brainteaser: How many times has the US government shut down? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- Can US companies and consumers weather higher rates? How has the US economy managed to avoid a recession amid historic rate hikes by the Federal Reserve? According to Jonny Fine, who heads up Goldman Sachs' Investment Grade Syndicate in the Americas, it comes down to how companies and consumers positioned themselves back when rates were much lower. Companies did a good job of issuing long-term bonds when it was attractive to do so, he says. “When we had very low interest rates, around 25% of all issuance in the US corporate bond market had a 20-year or longer maturity.” As a result, relatively little debt is coming due in the next few years, he explains, meaning that “there's no cliff effect and no wall of refinancing that investment-grade corporates have ahead of them.” Meanwhile, US consumers have shifted away from adjustable-rate mortgages. The 30-year fixed rate mortgage has become the “instrument of choice for the US homeowner,” Fine notes. “This is terrific, because it's meant that the US consumer has become less rate-sensitive to the changes that the Fed has been putting into place.” [Fine says the US is relatively unique in its lack of sensitivity to short-term rates](. “The US has numerous competitive advantages, including the structure of its bond market and the structure of its mortgage market,” which make the economy “less rate-sensitive than most economies around the world.” While rate hikes can have a lagging effect, Fine believes American companies and consumers remain in a relatively strong position. --------------------------------------------------------------- The IPO market's soft opening Signs of life in the global IPO market are spurring investor optimism that more companies will decide to go public this year. But a broader recovery in the market is more likely to kick off in 2024, says David Ludwig, global head of Equity Capital Markets in Goldman Sachs' Global Banking & Markets business. “I would say we're having a soft opening of the IPO market,” Ludwig says on [Goldman Sachs Exchanges](. “We're not at the time in the market where we're going to see that broad-based, widespread opening that any company can get public under attractive terms.” Not only are companies and sellers looking at the markets more actively and broadly, but potential shareholders are also engaging in more active discussions with companies that are likely to go public, he says. “They're all actively considering, ‘If I'm going to be adding risk to my portfolio, what are the types of companies and assets I want to put in the portfolio right now,'” Ludwig says. “Those two pieces allow us to get to better equilibrium to see transactions occur on a more consistent basis.” --------------------------------------------------------------- A US government shutdown could last weeks The odds of a US government shutdown are rising. If a deal isn't reached, a [shutdown could last two to three weeks, and more than one shutdown is possible]( says Goldman Sachs chief US political economist Alec Phillips. He estimates that a government-wide [shutdown would directly reduce growth by around 0.15 percentage point for each week it lasted]( or about 0.2 percentage point per week once private sector effects were included. Growth would rise by the same cumulative amount in the quarter following reopening. --------------------------------------------------------------- Bond markets are grappling with growing government debt As central banks drive up interest rates to contend with spiking inflation, [rising government debt burdens are an increasing concern]( that could ripple through the bond market, according to Goldman Sachs Research. The average ratio of developed market debt to GDP has risen to around 100%, up substantially from less than 70% before the financial crisis in 2008, says George Cole, Goldman Sachs Research's head of European rates strategy. “This is a really broad-based phenomenon,” he says of the rise in borrowing. The factors that tend to influence debt levels — inflation, economic growth, and spending deficits — suggest the debt-to-GDP ratio is going to rise more, on average, in developed markets. As borrowing climbs, Cole says, there's a risk that longer-term interest rates could end up higher than investors are expecting. Cole's analysis also shows inflation has played a much smaller role in reducing debt ratios since the 1980s when central banks began inflation targeting and succeeded in subduing inflation. The upshot is that the primary balance — the difference between revenue a government collects and spends, not including interest expense — now plays a much larger role when it comes to changes in debt. And in most major economies, most notably the US, there aren't plans to tighten budgets. “Although we might see a period of calm in bond markets, we do think the risks are skewed toward a higher risk premium as the market thinks about these risks,” Cole says. --------------------------------------------------------------- PayPal's CEO says the US consumer has been resilient but is showing signs of fragility Dan Shulman of PayPal and David Solomon of Goldman Sachs The US consumer has been a source of strength for the economy in the wake of the Covid-19 pandemic. But cracks may be starting to show in consumer finances, according to PayPal CEO Dan Schulman. While the economy is “not out of the woods yet,” he adds, inflation is beginning to fall and we're “moving in the right direction.” “The consumer has been pretty resilient — I think everyone's seen that,” [Schulman said in an interview with Goldman Sachs Chairman and CEO David Solomon at the Communacopia + Technology Conference in San Francisco](. “But I do think the consumer is somewhat fragile right now.” Schulman points to household savings that are “coming down quite meaningfully,” as pandemic-era government benefits are exhausted and spending on so-called “revenge travel” peaks. Schulman also cites data showing that consumer credit is reaching record levels. “You're beginning to see credit defaults tick up a little bit,” he says. That assessment aligns with other company leaders' views expressed during second-quarter earnings. Goldman Sachs Research found that a theme during the most recent earnings season was “newfound concern” about the health of the lower-income consumers due to rising delinquency rates on credit cards and subprime loans for cars. But the team also noted that its analysis of retailer financial results indicates the lower-income consumer is “outperforming.” Credit card data tells a similar story of outperformance, though spending by lower-end consumers is expected to slow somewhat in the fall. PayPal recently announced that senior Intuit executive Alex Chriss would succeed Schulman as the company's president and CEO on September 27. --------------------------------------------------------------- Quoted at GS “There is a lot of hype around AI, so we need to be careful to parse out what's real and what's more the imagination of people. It's not the solution to everything. As there's growing evidence suggesting significant productivity gains, businesses need to balance the reality of AI being an efficiency tool with the perspective of it being a profound, disruptive driver of growth.” – Goldman Sachs Chief Information Officer Marco Argenti Argenti shares his insights on the opportunities and challenges of AI, as well as Goldman Sachs' engineering priorities in a [post on our careers blog](. --------------------------------------------------------------- Briefings Brainteaser: Rising odds of a shutdown As politicians in Washington debate a last-minute funding deal, the odds of a shutdown are rising. How many times has the US government shut down since the 1970s? A) 5 B) 10 C) 20 D) 30 [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [Fortune]( September 25 [Exclusive: Wall Street's next leaders are embracing AI and bullish about their financial future, according to Goldman Sachs's summer intern survey]( [The Wall Street Journal]( September 15 [Goldman's pitch to rich clients: Hey, buy a piece of this sports team!]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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