Published March 24, 2023
The struggle for markets to find an uptrend continues as the bank sector provides plenty of storm clouds, the near-term future of the economy is completely uncertain, and the Fed continues to fight the last fight (aka inflation). Here is a round up of some brief points from a recent article by Blaine Rollins at Hamilton Lane.
The outlook for inflation continues lower…
US PPI came in sharply below consensus expectations in February (4.6% vs. 5.4% expected) and now targets CPI closer to 4% in the next one to two months.
Raoul Pal
And Friday showed that consumers expect inflation to keep heading lower…
@LizAnnSonders: 1yr inflation expectations per UMich (blue) fell in March to 3.8%, while 5-10yr expectations (orange) fell to 2.8%
The U.S. equity markets have performed well even with the recent banking crisis…
Give credit to the continued strong job numbers, falling inflation and collapse in interest rates. Investors might be fleeing bank stocks, but they are not leaving stocks. They are just shifting towards areas of the market which might be better positioned for lower rates and less economic certainty. The chart below shows the relative stability of the S&P 500 (top box) compared to the plunge in regional banks (middle box, symbol: KRE) and 5-year Treasury yields (bottom box, symbol: $FVX)
StockCharts.com
Investors have become more worried about the economy as easily seen in the charts of 2-year yields and oil prices…
NYTimes
Investors have a right to be worried about the economy if the Philly Fed is one of their primary indicators…
@LizAnnSonders: March @philadelphiafed Index rose to -23.2 vs. -15.0 est. & -24.3 prior; employment dropped to -10.3 (now in contraction)
@LizAnnSonders: March @philadelphiafed Index rose to -23.2 vs. -15.0 est. & -24.3 prior; employment dropped to -10.3 (now in contraction)
The decline in growth and inflation expectations has worked its way into the long bond…
Note that the long bond ETF (chart below, symbol: TLT) might have found a new home above its 200-day moving average. The stability of the long bond ETF and possible move upward suggests long-term interest rates may have peaked for this cycle.
StockCharts.com
But still plenty of consumer strength in the U.S. economy as seen by Delta Airlines…
As for the issues plaguing the bank sector, we thought these comments from one of the Big Four bank CEOs was interesting (from an interview on Bloomberg):
“Citigroup CEO Jane Fraser said mobile apps and consumers’ ability to move millions of dollars with a few clicks of a button mark a sea change for how bankers manage and regulators respond to the risk of bank runs.
Fraser said the fast demise of Silicon Valley Bank also made it difficult for banks to assess and prepare bids for its assets. Speaking just two weeks after the California-based lender collapsed under the weight of tens of billions of withdrawals by its venture capital clients, Fraser said her firm hopes a buyer will emerge in the coming days.
“It’s a complete game changer from what we’ve seen before,” Fraser said Wednesday in an interview at an Economic Club of Washington event. “There were a couple of Tweets and then this thing went down much faster than has happened in history. And frankly I think the regulators did a good job in responding very quickly because normally you have longer to respond to this.”
In the space of just 11 days this month, four banks collapsed, including three regional US lenders and the Swiss financial giant Credit Suisse Group AG. A fifth firm — First Republic Bank — is teetering. Amid the turmoil in global financial markets, stocks have careened wildly and investors have lost billions of dollars.
Citigroup was among 11 banks that joined to provide $30 billion in deposits last week to First Republic, in an effort to shore up the San Francisco-based lender beset by client withdrawals and credit-rating downgrades. Wall Street leaders and US officials are searching for a rescue plan, and are exploring the possibility of government backing to make the firm more attractive to investors or a buyer.
Fraser stressed that the string of bank failures was isolated, noting the biggest US banks remain well capitalized.
“We’re talking about a few banks,” Fraser said. “This is not something that is spread across the entire banking system. This isn’t like it was last time. This is not a credit crisis. This is a situation where a few banks have some problems and it’s better to make sure we nip that in the bud.”
Finally, based on the above comments, we wonder if markets are not grossly overreacting at this point to the bank issues. The Fed and U.S. Treasury have essentially affirmed their willingness to support depositors at almost any cost. The risk remains that banks have made bad loans, with markets especially concerned now about commercial real estate loans. But the downside risk seems contained for the big banks with the Fed all but assuring investors that interest rates have peaked for this cycle. Recession concerns also remain, but even there, the data suggests a strong labor market will likely lessen the impact, again noting the comments from CEOs above. The current bearish market period has been going on for over a year and perhaps as long as 15+ months, consistent with the duration of most bearish periods. Maybe stocks dip once more as this mini-shift to mega-cap FANGMA stocks settles down while other parts of the market fail to pick up any slack. At this point, it seems far easier to construct a scenario where the current crisis is contained, and investors are over-worried than one where the bottom falls out. The caveat always being that markets are emotional and panic can quickly take hold. If nothing else, on the fear-greed scale, fear would appear to be substantially ahead of the greed factor. For one interesting chart of market condition, we look outside the U.S. to Europe, where one of the biggest banks was just taken over. The index of the largest 50 stocks in Europe sits within striking distance of all—time highs.
Market Update
Markets opened the week reacting to news of a forced marriage between Switzerland’s two biggest banks as the Swiss National Bank pushed to resolve the issues leading to Credit Suisse’s plunge last week. Stock investors cheered the move with the S&P 500 rising +0.9%. However, U.S. bank First Republic sold off hard on news that major bank CEOs were working together to find a solution to backstop a crisis of confidence in the bank, a ripple effect of its neighbor Silicon Valley Bank’s sudden demise. Soothing words from U.S. Treasury head Yellen kept buyers flowing into bank stocks Tuesday adding another +1.3% to the S&P 500’s price. Investors were also positioning ahead of Wednesday’s outcome from the latest Federal Reserve meeting, where expectations have coalesced around a 0.25% hike in short-term interest rates, a smaller hike than was expected before the bank crisis. Stocks gave back the gains, however, in Wednesday’s session as investors responded poorly to words from Fed Chair Powell and Treasury lead Yellen. Powell reiterated the central bank’s inflation-fighting mandate while generally easing a bit his prior language on the topic. However, Treasury’s Yellen ignited a bit of a firestorm in comments saying that there was no plan for the government to “guarantee” ALL bank deposits, which is nothing new, frankly. But with confidence in the banking system at the forefront of investor minds, any perception of a lack of support is dealt with harshly in this market. Stocks gave back -1.4%. An opening gain in stocks Thursday gave way to more selling as bank stocks came under further pressure. Ms. Yellen tried to refine her prior comments on insuring deposits with broad remarks on supporting the banking system. Friday brought another report of bank troubles with Germany’s Deutsche Bank under pressure. But the broader market held up with stocks spending the day bouncing around the flat line.
Another volatile week for investors left stocks indexes higher with the S&P 500 (SPY) up +1.48% while the Nasdaq 100 (QQQ) pushed to new highs for the year with a +1.97% as the tech/consumer heavyweights have benefitted from a drop back in interest rates. Smallcap stocks (IWM) continued to lag with only a +0.70% tick upward for the week.
Warm wishes and until next week.