03/13/2023 Market Strategy
Exiting Periods of Crisis Seldom Comes Easy
Bank solvency worries sent the VIX index to its highest levels since December
Key Takeaways
- Stateside banks across market capitalizations moved lower last week as market participants assessed the failure of Silicon Valley Bank and the implications for the banking sector and broader market.
- On Sunday night the Fed, FDIC and Treasury released a joint statement assuring depositors that they will be made whole.
- February’s nonfarm payroll number released on Friday came in well ahead of expectations while wage growth surprised to the upside and labor force participation rose.
- Resilience exhibited in last week’s economic data raised concerns that the Fed will likely have to raise rates for longer than earlier expected.
- With 499, or 99%, of the firms in the S&P 500 index having reported, earnings are off 2.9% from a year ago on revenue growth of 5.6%.
- Results have been mixed with three sectors showing double-digit earnings growth from a year earlier, one showing single digit earnings growth and seven showing declines.
Traders and investors were reminded over the course of the last week that just as unpleasant and even dangerous side effects can occur with necessary medical treatments and prescription drugs so can collateral damage occur to companies whose fortunes are tied to ownership or issuance of fixed income securities amid a Federal Reserve rate hike cycle after a bank in Silicon Valley failed.
The bank’s failure rankled trader and investor sentiment that had been rattled earlier on concerns that resilience evidenced in the latest economic data and February’s jobs numbers might push the Federal Reserve to raise its benchmark rate by 50 bps at its next FOMC meeting rather than by the 25 bps previously expected.
Angst about what might be “the next shoe to fall” spread through the markets like wildfire, pushing stock prices lower last Friday as bond prices moved higher and yields moved lower.
On the last day of the week the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in tech and tech related names) closed respectively lower by: 1.07%, 1.45%, 2.83%, 2.95%, 2.5% and 1.76%.
On the week those same indices respectively fell: 4.44%, 4.55%, 7.39%, 7.67%, 8.07% and 4.71%.
Over the weekend tension remained high as concerns increased as to whether the issues at the failing bank were idiosyncratic (related specifically just to that institution) or whether the problem was systemic (related to more than just one or a few banks).
On Sunday evening as we prepared to publish Bloomberg news reported that regulators had moved on Sunday to assure all depositors that their money was safe following the collapse of Silicon Valley Bank and that a new lending program offered by the Federal Reserve with funds from the Treasury Department would be set up.
Bloomberg further reported that Treasury Secretary Janet Yellen approved the actions, which enable the Federal Deposit Insurance Corp. to resolve SVB “in a manner that fully protects all depositors.” The announcement was made in a joint statement on Sunday by the Treasury with the Fed and the FDIC. The joint statement added that taxpayers won’t be responsible for any losses associated with SVB’s resolution.
Market participants, while likely sighing a collective sigh of relief, will likely ponder the details of last night’s action over the course of the week as well as developments and economic data released from here to the Fed’s next FOMC meeting on March 23.
We continue to believe that while we are not yet “out of the woods” that we are headed in the direction toward a “next new normal” and a sustainable economic expansion.
The Federal Reserve’s efforts to curb inflation while meeting challenges that present themselves along the way should remain the order of the day. Ultimately “the end of free money” and the return to a more normal interest rate regime in which bond issuers pay for the privilege of borrowing and bond buyers get something in return should lead to an environment for investors in which fundamentals matter more and leverage gets right sized.
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