More Bankruptcy Reorganizations

Normally, when a firm goes bankrupt, you imagine a liquidation where all employees are fired and all assets are sold. But this is not what is happening at the moment. A record-high 70% of US bankruptcy filings this year have been reorganizations, see chart below.

High stock prices and tight credit spreads help companies reorganize instead of liquidating. Combined with the wealth effect of easy financial conditions on consumers, it is harder for the Fed to get inflation under control when financial conditions continue to ease. Put differently, easy financial conditions dampen the traditional transmission mechanism of monetary policy.

US bankruptcies: Fewer liquidations and more reorganizations
Source: S&P Capital IQ, Apollo Chief Economist. Note: Data till March 14, 2024. Bankruptcy figures include public companies or private companies with public debt with a minimum of $2 million in assets or liabilities at the time of filing, in addition to private companies with at least $10 million in assets or liabilities. Chapter 11 liquidation and Chapter 7 bankruptcy filings are categorized as liquidation and other Chapter 11 bankruptcy filings as reorganization.

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Outlook for Banks

Since the beginning of the year, the banking sector has been underperforming the S&P 500, and the regional banks have been underperforming the broader banking sector, driven by deteriorating earnings expectations for regional banks, see charts below. Our latest banking sector chart book is available here.

Regional bank stocks underperforming
Source: Bloomberg, Apollo Chief Economist
Earnings expectations falling for regional banks
Source: Bloomberg, Apollo Chief Economist

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S&P 500 Market Cap Is Up $10.9 Trillion Since the Fed Pivot

The S&P 500 is up 25% since the November FOMC meeting. That is a $10.9 trillion increase in the market cap of the S&P 500 in five months.

Similarly, with lower rates and tighter credit spreads, the market cap of the US bond market is up $2.6 trillion. That’s a total increase in wealth since the Fed pivot of $13.5 trillion. For comparison, US consumer spending in 2023 was $19 trillion.

Combined with higher home prices and higher bitcoin prices, the bottom line is that the wealth gain experienced for US households since the Fed pivot is at least 70% of consumer spending, and this is going to be a strong tailwind for private consumption over the coming quarters.

Wealth has increased $13.5 trillion since the November FOMC meeting
Source: Bloomberg, Apollo Chief Economist. Note: Indices used are WCAUUS Index and LC07TRUU Index.

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HY Default Rates and Financial Conditions

Higher costs of capital have pushed up default rates in high yield corporate credit since the Fed started raising rates in March 2022.

But since the Fed turned dovish five months ago, credit spreads have tightened and stock prices have rallied, which has reopened capital markets with more M&A activity and IPO activity.

As a result, the high yield default rate is now beginning to flatten out, see chart below.

In short, the negative effect of Fed hikes is being offset by the Fed pivot and the associated easing in financial conditions.

HY default rates: The negative effect of Fed hikes being offset by easier financial conditions
Source: FRB, Moody’s Analytics, Haver Analytics, Apollo Chief Economist

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Mind the (Funding) Gap: Finding Opportunities in Real Estate Debt Amid Dislocation

Higher interest rates have pressured real estate prices, but fundamentals remain stable across most property types. In this white paper and on-demand class, we examine the state of the real estate market and discuss the opportunity in RE debt in light of wider spreads, more lender-friendly terms, and significant refinancing needs.

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Key Takeaways

  • Higher interest rates have pressured real estate prices, but fundamentals remain stable for most property types. Coupled with rising base rates and spreads, lower lender leverage, and heightened ability to drive terms in a constrained funding market, we believe that real estate debt presents an attractive opportunity in the current market environment. And we see this potential opportunity augmented by significant amounts of maturing loans and funding gaps.   
  • Specifically, certain challenged office is indeed a part of CRE that is in distress due to structural changes in the way office space is used following the Covid-19 pandemic. But, apart from office, sectors such as industrial, multifamily, and others are showing resilient fundamentals. Additionally, secular trends continue to carry on for some traditional and specialized sectors. In other words, it is key, in our view, to not equate CRE as a whole to what’s happening specifically in the office space.
  • CRE is a highly diverse asset class, comprised of other traditional sectors such as multifamily, industrial, retail, and hotels. It also includes sub-sectors (e.g., student housing, cold storage, self storage, and data centers) that arise from traditional sectors due to changes in needs, advances in technology, changing consumer behavior, and other trends. Each type of property has its own use cases, characteristics, trends, and demand drivers that can offer opportunities for growth.
  • There is a large need for capital on the horizon as significant amounts of real estate loans are expected to mature over the next few years. And funding gaps from declining property values and stricter loan standards need to be closed, offering another area to provide capital. We believe that real estate debt presents an attractive opportunity in the current market environment due to the potential for higher yields and lower leverage levels on reset valuations, providing more protective loan structures. We see the opportunity to originate real estate debt attractive in both the US and Europe.
  • The opportunity is augmented for private capital providers, given some traditional funding sources—such as banks and the securitization market—have retrenched, leaving a void for other lenders to fill.
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The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


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Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

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Strong Tailwind to Stocks and Credit

One way to measure liquidity is to add bank reserves and money market assets, see chart below which shows that there is record-high liquidity to push stock prices higher and credit spreads tighter. In particular, once the Fed starts lowering interest rates, some of the $6 trillion in money market funds is likely to find its way into stocks and credit.

Record-high liquidity to support equity and credit markets
Source: ICI, FRB, Haver Analytics, Apollo Chief Economist

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Incoming Data Suggests Monetary Policy Is Not Restrictive

The best guide to whether monetary policy is restrictive is not r-star but the incoming data. The incoming data shows that after the Fed turned dovish and the stock market rallied, we have in January and February seen strong employment growth, low jobless claims, and upward pressure on CPI and PPI inflation.

Maybe the lagged effects of Fed hikes work after 12 to 18 months through income in the consumption function. However, the effects of easy financial conditions on consumer spending are immediate. Given that financial conditions have eased significantly over the past five months, with record-high stock prices, tight credit spreads, and rising home prices, it is not surprising that the incoming economic data is strong.

The bottom line is that the last mile is harder because of the immediate positive impact on the economy of record-high stock prices. In contrast, the long and variable lags work mainly through a rising unemployment rate.

In short, the long and variable lags of monetary policy have been overwhelmed by the 25% increase in the S&P 500 since November.

Fed model estimate of r-star
Source: FRBNY, Haver Analytics, Apollo Chief Economist

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Trend Wage Inflation Is 5%

The New York Fed has constructed a new measure of trend wage inflation, which currently is running at 5%, see chart below and here.

Wage inflation at 5% is not consistent with the Fed’s 2% inflation target. The Fed will keep interest rates higher for longer.

This is not surprising given the ongoing reacceleration in both nonfarm payrolls and CPI and PPI inflation, likely driven by the significant easing of financial conditions since the December 13 FOMC meeting and Chris Waller’s hawkish-to-dovish speech in November.

Trend wage inflation is sticky around 5%
Source: Federal Reserve Bank of New York, Apollo Chief Economist

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Liquidity in Public and Private Credit Converging

The total amount of corporate bonds outstanding is now over $10 trillion, and the primary dealer inventory of corporate bonds is $33 billion, see chart below.

This is not a liquid market. When credit markets are quiet and calm, it gives the impression that liquidity is fine, but if many holders of credit suddenly want to sell, liquidity will disappear. Even in quiet markets, finding a bond can take several days.

With more evergreen funds with monthly and quarterly liquidity in private credit, the reality is that the liquidity situation in public and private credit is converging, and in some cases, if you want to buy or sell a big amount of public credit without moving the price, private credit may be more liquid.

Liquidity is very thin in corporate bond markets
Source: FRBNY, Haver Analytics, ICE BofA, Bloomberg, Apollo Chief Economist

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Strong Demand for $100 Bills

When the Fed lowered interest rates to zero in 2008, demand for $100 bills started growing faster than demand for $1 bills, and there are now more $100 bills than $1 bills in circulation, see chart below.

There are more $100 bills in circulation than $1 bills
Source: Federal Reserve Board, Apollo Chief Economist

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