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The FED cut interest rates by twenty five basis points Wednesday and signaled that two more cuts could be coming this year.
Where we got pretty much exactly what the market had expected.
In anticipation of the announcement, stocks had been climbing, but then the news dropped.
But once people started parsing the dot plant and started parsing what j Powell had to say, stocks flit back, with the S and P, the Nasdaq ending in the red, and a two percent rally in the Russell being almost entirely erased.
Fetchaer. Jerome Powell got to the heart of the market's concern in his press conference.
There are no risk free paths now.
It's not incredibly obvious.
What to do.
Inflation is still elevated, and the labor market is showing signs of weakness. It's all keeping investors on edge in what's already been a particularly tumultuous year.
The stock market here in the US sort of record highs yesterday.
Last week's election is one.
Fact stock market closed out the week with the worst day of the year so far.
This trade war continues to wreak havoc on market and Wall Street is sending real signals about the sell off. Credible numbers. Here comes just hours after President Trump announced a ninety day pause on tariffs for many countries. The S and P five hundred major over the past two days has shed over five trillion dollars in value.
Okay, that is the worst that we have seen since COVID. All those zigs and zags of the stock market have been unsettling to many investors, but they've also helped fuel the rise of a special kind of investment vehicle. Structured products.
In the simplest term, structured products are effectively at debt security.
That's Sam Potter, who edits Bloomberg's Markets coverage. Structured products or structured notes are complicated financial instruments, a hybrid between a historically low risk bond and a higher risk derivative like a stock option or future.
So combining the best of both worlds.
They're often pitched as a smart way for investors to hedge against risks when the market outlook is more volatile, like it is now. Structured products had fallen out of favor in the US in the wake of the two thousand and eight financial crisis, when Lehman Brothers collapsed. Billions of dollars worth of structured products were wiped out along with it, but nearly two decades later, structured products are back.
Last year, the American market for these products was worth nearly two hundred billion dollars, a record high, and this year it's on course to be even bigger.
People are looking for an alternative way to grow their wealth and also protect it.
It's a shift. Bloomberg Equities reporter ye Chin Shen has been tracking.
With interest remembers these structure notes. They function like a bond for most pot but they are not a bond, and that's the catch.
I'm Sarah Holder, and this is the big take from Bloomberg News Today. On the show The Rise of Structured Products in a Volatile market, The investment vehicles are being marketed as a winning vet, but the reality is more complicated. Structured products are complex by design. So I called up Yachin Sheen to help me understand how they work.
I am a reporter on the equities team, so I cover Abigehres and Alstin's complex.
Structured products, also known as notes, are designed to combine the rewards of investing in stocks with the security of investing in bonds.
It's a hybrid instrument, so it is a bond with an all hunts twist.
Part of the product functions a lot like investing in a bond. You're supposed to get fixed returns over time, but the other part of the product functions more like an investment in the stock market.
The derivative of the auction pod is what makes things really splicy of because now that you have your return linked to some other assets. It could be an index, a stock, or a boss code of that.
So that's what makes it a hybrid instrument with a twist. By combining these properties, they're supposed to offer investors all the safety of a bond, but with higher returns, but those returns depend a lot on the performance of the asset they're linked to. There are a bunch of different kinds of structured products, but the most popular version is known as an auto callable. They make up more than half of the structured products on the market right now.
When you buy an autocallable, you invest in a product's performance over a certain amount of time, say four years.
So example, what be a auto callable that is linked to SMP five poundred.
At six states. Throughout the term of your investment, say every quarter, you can elect a certain amount of money in coupons, just like a bond interest payment. Provided the underlying asset performs in just the right way.
As long as SMP five pondre the underlying stay wins to arrange them, you will get your coupons, and by the end of the null ends you will get your money back the principle back.
The extra twist with an autocallable is if on one of those dates the value of the SMP is over a certain threshold, say again of ten percent from its starting level, the term of the investment automatically ends early.
If you know, the market goes really well and the SMP jumps walls and ten percent, you'll not well get called back earlier.
Meaning even if you'd bought a four year structured product, the deal is over. The issue werk cashes you out.
But that's not bad, right, because you get your money back some couppoons.
Now, you might not make as much money as you would have if if you just invested directly in the SMP, but you can still theoretically earn a decent return without taking on as many risks as you would have betting on.
Stocks, and usually what happens is that people wazir proceeds back we invest.
One reason people reinvest, especially when things are volatile, is because the underlying investment doesn't have to perform that well for you to get paid. So as long as it stays below that ceiling, you get your coupons. You don't want it to outperform, but you also don't want it to underperform, because in an autocallable there isn't just a ceiling, there's also a floor.
The wolf case well be if the market really you know, flops and it drops below certain flow, it could be usually thirty to forty percent. That's where you started to lose money. And by that time there's no limitation how much you would lose. You lose as much as the market suffers.
Got it.
So, in an autocullable, you're getting your coupons, everything's going well. In less something horrible happens, then you might lose a lot of money.
Yeah, exactly. There's another way to think about it. You can picture two options. One is that okay, you stand under a solid roof. That's like buying a typical bond, you get very steady, solid return, very safe or compared to you can buy and carry an umbrella. That's like buying a structure note. So with that umbrella you can now go out and walk it wrong.
Walking around outside under your structured product umbrella might be less cozy than staying home, but it gives you more chances to make returns in this universe. Pretend buying that umbrella gives you the opportunity to collect a five dollars bill on the sidewalk every few blocks.
When the weather is decent. You know everything's good, You get the returns, and even it gets a bit of windy, totally fly. But the real task is when a storm hits.
A storm being a market crash or an extreme dip in stock performance, that's.
Where your umbrella phillips and you get sold and the money blows away. So that's the worst case and you suffer.
So if you want to be really safe, just live in your house. But if you want to take on a little bit of risks, have the opportunity to make a little bit more money, you can buy the umbrella. You can buy the structured note, roam free and hope that a big storm doesn't come exactly. This is the whole pitch behind buying a structured product. Your upsides might be capped, but at least your downsides are capped too, unless, of course, the big storm hits.
They're marketed as hitting the sweet spot between safety and speculation.
That's Sam Potter, a senior editor with the Market's team at Bloomberg, and he says that's why structured products tend to sell well in moments when the markets feel unpredictable and investors are uncertain.
Moments like now, when valuations get very lofty, people get nervous, especially when you've got kind of trade war situation, a lot of geopolitical tensions, and unpredictable administration in the White House. People don't want to eschew the chance for more returns, but equally they don't want to have everything at risk, and they see structured products as a way to maybe have a little bit of security on their principle, but still get the returns. So I'm not surprised at all
that the interest is picked up. They've always been big in Europe and in Asia, but finally catching hold in the US.
Last year, financial firm sold a record one hundred and ninety four billion dollars worth of structured notes to American investors. This year is expected to top that, and not just because people are feeling uncertain but because banks see that uncertainty as an opportunity.
If managed correctly effectively, people are buying these notes and they don't tend to sell them off. That's it rarely a secondary market, so it's a form of sticky capital for banks to get good deposits to have.
Selling structured products can help banks bring in more fees while capping the amount they have to pay investors. But for the investors themselves, there are more risks lurking in the fine print. That's after the break. Recently, retail investors have started parking more of their money in special investments called structured products. The pitch is simple, if investing in the stock market is too risky and investing in bonds
is too vanilla, structured products could be just right. But Bloomberg Market's editor Sam Potter told me they might not be right for everyone.
Risk is just a complexity. Do you really understand the risk profile of what you're taking on? I mean, we've talked about kind of quite simple examples. Something that's just tied to the range of the S and P five hundred. But the notes can get really complicated. You could bring in another couple of indexes and say the lowest of this is the range that we're going to use, and we're going to use these set dates for measurement. So the first thing is just the sheer complexity. The second
thing is understanding the fees. You pay the fee up front in the price of the product, which is unlike something like an ETF which has an ongoing fee. So do you really understand if you're getting your value for money?
Often, Sam says the answer is no. Plenty of people invest in structured products without fully understanding them. They've earned the nickname boomer candy because of how popular they've gotten with a particular kind of wealthy retiree, someone with money to spare and a higher appetite for risk.
I think the danger is the complexity maybe does obscure the risk that could be underlying these things.
Those risks include the possibility of losing more than you bargained for in a market downturn, or of paying too much to make a bet that could turn out to be bad. And there's another more fundamental risk that even if the bank has essentially guaranteed you'll get your principal investment back, your bank could fail and you could lose everything.
It was a manic Monday in the financial markets.
Lehman Brothers, a one hundred and fifty eight year old firm, filed for bankruptcy.
Leman in particular stands out because in the last year or so of its operation, it was struggling to raise money elsewhere, and so it actually ramped up the production and sales of these structured notes. It was already a big issuer, but in that last year, as I understand, it really rempt up production of its structured notes in order to bring more money into the bank.
As Leman struggled to raise money, it started leaning more into structured products.
And funnily enough, lots of those products that were sold were principal protection notes. So they actually a lot of them were even named, you know, one hundred percent principal protection tied to S and P five hundred or words to that effect.
One hundred percent principal protection, which means, in theory, one hundred percent of that initial investment would be paid back as long as that note was held to maturity, and they.
Sold a great deal of them in the last year before everything finally collapsed.
And what happened when Lehman collapsed in two thousand and eight, what happened to everyone who had bought those structured notes, I.
Mean, effectively, what they were told in the aftermath was these things are now worthless. So you've lent your money to the bank. The bank has gone under. And actually where structured products tend to sit in the hierarchy of people who can get money out of bankruptcy is pretty low. I do believe believe that there were many years of litigation that followed the Lehman collapse, and more than ten
years of litigation we're talking. And some of those structured product owners did get some of their money back, but billions of dollars were wiped out and a lot of people didn't get repaid.
Sam says the Lehman incident really tarnished the reputation of structured products in the US.
It really set the market back, and it has really been until this decade. It's taken to recover. You can go back and trace the market and the growth is very anemic. After Lehman Brothers, it falls off and then it's very very slow to come back, and it's only really kind of twenty twenty one onwards that it's really begun to take off again. I guess people required that
time at distance to put the pass behind. But also the circumstances as we just discussed of high asset valuations have kind of rekindled an interest in the notes.
These products are only as strong as the institution and that backs them, which is one reason why, unlike in some other parts of the world, they're heavily regulated in the US. Depending on what the underlying asset is and who distributes it, a structured note could be regulated by the SEC, FINRA and the CFTC. Another reason for all the oversight, structured notes are increasingly sold to individual investors.
While hedge funds and sophisticated money managers can and do buy structured products, many are able to create the same exposures on their own. Here's equities reporter Yu Chinshen.
If you are savvy enough, you can package those products on your own. Because it is a bond, right to break it down, fundamentally, it's a bond and an auctum package. You can just go to the market and create or replicate some similar auctionum package without paying your bank or going through the middleman to give you advice, right, and oh, exactly what the payout it's going to be.
But for everyone else, there's a broader lesson to take away from this. You might want to tread a bit more carefully when you're sold something with this much fine print.
You should see the sheets that come with these things. It's like a financial contract and it's got all the small print. And anytime Wall Street cooks up something complicated, I think people should be certainly careful about it.
This is the Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg dot com, subscribe today at Bloomberg dot com slash podcast offer. If you liked this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow