03/20/2023 Market Strategy
- March 20, 2023
Riders on the Storm
The collateral damage from a Fed rate hike cycle isn’t always easy to spot or handle
Key Takeaways
- All eyes on the Fed early this week until the FOMC decision on Wednesday. We expect the Fed will raise its benchmark rate by 25 bp.
- Equity markets traded mixed last week as mid-cap and small-cap benchmarks suffered declines on the current unfolding situation among regional banks.
- Growth stocks led by names in information technology and communication services drove the Nasdaq Composite higher last week on prospects that the US economy is slowing.
- Last week’s inflation data showed improvement on a year-over-year basis, but the monthly changes point to inflation’s persistence well above the Fed’s 2% target.
Stocks were jostled between gains and losses last week as traders and investors parsed economic data as well as the latest news items on the banking crisis that forced a consortium comprised of the Federal Reserve, the Treasury and the FDIC into action to stem the tide and avoid a worsening situation midst the regional banks from getting a lot worse.
Not unlike prior crises it should come as no surprise that at the source of the regional bank tumult was a group of the “smartest folks in the room” and even possibly regulators who missed signs that something was amiss that perhaps could have averted the disruption that the economy and the markets are now forced to navigate.
At least for now, from what has thus far been revealed, it appears that a lesson in bond buyers 101 class (freshman year stuff) was not applied in positioning at least one bank’s Treasury portfolio to take account of the risk inherent in a Fed rate hike cycle that began in 2022 and has proven longer in tenure that many expected.
Now it’s “all eyes on the Fed” until the conclusion of the Fed’s FOMC meeting this Wednesday when their latest rate decision is revealed to one and all.
From Here to Eternity? Likely not.
News over the weekend that a Switzerland based household and industry wide name in global banking was bought by another Swiss bank in a rescue effort to avert systemic risk appeared to ease some tension ahead of global market openings today.
Actions taken so far by the US Fed, Treasury and FDIC as well as the 30 bank consortium that took action last week suggest to us—that while inevitably “other shoes may fall” before the current disruption is stemmed—we are well on the way to resolving the latest debacle.
Now it’s “all eyes on the Fed” (a near ubiquitous headline) until the conclusion of the Fed’s FOMC meeting this Wednesday when their latest rate decision is revealed.
Will they hike the benchmark rate by 25 bps, 50 bps or perhaps pause their tightening policy at current levels? The direction that the markets will take in the near term will likely depend on their decision this week.
In our view, prospects for a 25 basis point hike on Wednesday appear most likely. Last week’s inflation dated was skewed toward the sticky nature of inflation coming from the service economy’s end of things even as commodities (particularly oil) moved lower on projections of slower growth tied to projections of what damage will likely be felt in the economy near and midterm should the costs of borrowing rise and stick higher as a result of what likely will be increased regulation over the regional banks.
Don’t Keep Me Wonderin’
Last week’s action in the stock market had something for both bears and bulls as stock prices were jostled to the beat of the latest news item and the latest projections given by authoritative sounding voices were offered. We’d expect that in hindsight to the current state of affairs their dark projections could likely be proven once again along the time line of market history as having been too negative for too long.
The Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russel 2000 (small caps) and the NASDAQ Composite (some 40% weighted in tech and tech related names) produced mixed performance results last week with the small and mid-caps’ exposure to regional banks dragging their respective performances lower. On the week the S&P 400, the S&P 600 and the Russell 2000 shed: 3.19%, 3.28% and 2.64%. The Dow Jones Industrials was flat with a negative bias off 0.15%. Last week the S&P 500 advanced 1.43% aided by the tech sector and the communications sector (with growth-stock exposure in both) while the NASDAQ surged 4.41%
We’d avoid getting mesmerized waiting for the “next shoe to drop” and focus on the Federal Reserve this week.
In our experience it’s not so much about what takes the market down as it is about how quick the authorities are in responding to the problem. While the disclaimer “past performance is no guarantee of future results” always applies—the US has established historical precedence in the ability to “get into trouble” but has also been quick at addressing the problem whether stemming from financial, geopolitical or health crises.
While the title of The Doors’ classic rock tune “Riders on the Storm” would seem appropriate for where investors find themselves at the start of this week the lyrics to another Doors tune, which advise, “..when the music’s over turn out the lights...” in our view does not apply.
The Fed may have removed the proverbial punch bowl of “free money” but has thus far in the process shown its ability and commitment to keeping to its dual mandate of maximizing employment and staying vigilant against inflation.
Beware of darkness.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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