A week following three major US bank failures that then saw two other banks sail very close to the wind ended with stock markets higher, the S&P 500 was up 1.4% for the week and the NASDAQ closed 4.4% higher. Anyone who claims they can correctly predict this stuff is such a liar.
Monday was the largest trading volume day so far this year on US exchanges (a record that lasted until Friday, when it was surpassed) and saw a bloodbath for shares of many regional banks on the back of the failures of Silvergate, Silicon Valley Bank and Signature Bank amid fears of financial contagion (see EXPLAINER: FINANCIAL TERM OF THE WEEK below).
These types of institutions are more reliant on net interest income (the difference between what they borrow and lend for) than larger Wall Street institutions which have additional diversified revenue sources including investment banking, trading, and wealth management.
None fared worse than First Republic Bank (FRC), whose stock plunged almost 70% on Monday before rallying back later in the week after it got assurances of some protection from the regulators and financial propping-up from its Wall Street banking pals like JP Morgan and Wells Fargo. It then slumped again on Friday after the bank announced that its dividends were a thing of the past.
For the third week running, there were extraordinary shifts in the market’s perception of what the Fed will do at this week’s March 22nd meeting, the idea being that in such a jumpy environment the Fed could not risk jacking rates up very far, if at all.
Indeed, there was a feeling that this turmoil could be the Fed's "get out of jail free" card, meaning that the banking crisis gives it the perfect cover to scale back or even pause its rate hikes, maintaining credibility in doing so by citing uncertainty in the banking sector as the “legitimate” reason.
This idea that the fallout from the crisis might help do the Fed’s job for it pushed non-financial stocks considerably higher for much of Monday’s trading session as, once again, the stock market priced in imminent Fed pivots and pauses having just got burned by doing exactly this literally only a month ago.
Interest rates on 2 year and 10 year Treasury bonds, which should be boring but have been acting like crazy biotech stocks lately, slumped hard, driving bond prices higher. The 2 year fell from above 5.0% to 4.0% in just three trading sessions. The technical term for this is; a friggin’ massive move - not seen since The Bangles were first advising us all to walk like an Egyptian in 1987.
As you will have seen in last week’s report, the futures market-based probability of a half percent hike by the Fed this Wednesday ended the previous week at 68%. By Monday evening, that probability was priced at .. zero, where it remained all week.
The likelihood of no change at all in rates being announced this week, priced at zero for months now, ended last week at 38% (Goldman Sachs analysts even came right out and said it - they think the Fed will leave rates unchanged as a result of what is happening in the financial sector). The remaining 62% probability said that a quarter of a point rise was on the cards.
The market has now priced in large interest rate cuts by year-end, with the probability of rates being lower than the current 4.625% now at 99%, and a two-in-three chance that rates will be below 4.00% on New Year’s Eve. This turnaround is quite astonishing when you look at the comparisons of where these probabilities were just a week ago and a month ago (see FEDWATCH TOOL below).
Before the market open last Tuesday morning we learned that, in the twelve months through February, the overall Consumer Price Index (CPI) measure of retail inflation rose 6.0%, compared to 6.4% the previous month. The January to February monthly rise was 0.4%. The year-on-year Core CPI rate, which excludes more volatile food and energy costs, was 5.5%, down a touch from the prior month. These readings were all broadly in line with expectations and supported a narrative that, while inflation is still a problem and the 2.0% Fed target remains pretty far away, the overall trajectory is still disinflationary - even if it is not as steep as the Fed would like.
This was broadly confirmed by the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers which came out the next day better than expected.
The market’s reaction to the CPI report dovetailed with the emerging lower or even no rate hike expectations as well as with an exhale when it came to assessing bank contagion risk and this all drove all stock prices nicely higher on Tuesday.
Fears that another shoe was dropping, however, emerged on Wednesday when shares of troubled Swiss bank Credit Suisse (CS) fell over 27% in pre-market trading amid reports that its Saudi sugar daddy had ruled out any further financial assistance. Now anyone even half-paying attention knows that Credit Suisse has been a dead bank walking for months now (it’s even been previously mentioned in this very publication).
Quite why everyone was acting so shocked on Wednesday that a crap $2 to $3 stock of an institution already shown to have been involved in facilitating international drug dealing, global espionage, malicious and deliberate data leaks of client information, government corruption in Africa, complicity with fraudulent billionaires and hedge funds and more, became even crappier is a bit of a mystery to me but regardless, the previous day’s stock market gains were swiftly vaporized.
The schizophrenic feel continued for the rest of the week. Thursday saw markets move solidly back higher again as Switzerland announced that it would essentially backstop Credit Suisse and the Zero/Small-Rate-Hike narrative re-emerged.
Friday was always going to be wild as it was one of the four“triple-witching days” that happen each year, when individual stock options, stock index options and stock index futures contracts all expire on the same day leading to significant position covering. Kerosene was thrown on the fire by something of a re-examination by investors of what had initially been thought to be the “good” First Republic and Credit Suisse news from the day before and another pretty substantial down day was the result.
All eyes now turn to Wednesday afternoon and the Fed’s interest rate decision and Jerome Powell’s associated press conference and, for the first time in a long time, it’s actually a little unclear which way they will go. I’m on Team Quarter-Of-A-Point-Rise right now, but we will have to get through the rest of this weekend plus two more days of banking sector news narratives before we learn the outcome.
It’ll be an interesting week. I suggest strapping in.
OTHER NEWS .. Banking Crisis Edition (kind of an Op-Ed, I’m afraid)
This is absolutely NOT 2008 .. There is far too much irritating, lazy media comparison between now and 2008 when it comes the events of the last week or two. While you expect this from clueless simpletons on FinTok and Instagram, I’ve also seen it on more respectable outlets that should know much better.
The biggest difference (of many!) between 2008 and now is that fifteen years ago, the assets held at the troubled banks (mortgages on homes) were hopelessly underwater. The home values were way below the value of the mortgages owned, which created massive losses and colossal solvency issues.
Today, the assets held at the troubled banks are US government Treasury bonds which are still worth exactly what banks paid for them (par value) as long as they don’t have to be sold in distress. This makes what we are seeing today a liquidity issue, not a solvency issue. In the grand scheme of things, liquidity issues can be overcome. Solvency issues cannot.
We know from the evidence placed before our eyes over recent months and years that the tech sector, and more especially the crypto-adjacent part, is systemically infused with greed and - in many cases - outright fraudulent and criminal activity. What is emerging from the Silicon Valley Bank debacle is not so much greed or fraud, however, as much as just sheer financial incompetence and a complete lack of understanding about the very basics of risk management on the part of senior executives.
You’d think that now would be a good time for tech bosses and VC bros to be a bit humble - grateful even, but at the very least to simply STFU. Alas .. I strongly support the general principle of always keeping bank depositors completely whole (even beyond the $250k FDIC limit) through insurance in the case of a bank failure (you shouldn’t need to have forensic accounting skills when choosing where to open your checking account) while simultaneously standing back and watching the equity and bondholders get wiped out. Sorry guys, that’s the game. I commend the authorities for how they handled things last weekend.
On the other hand, I also strongly agree with the sentiments expressed in this article that these events are emblematic of a venture-capital apparatus that is too unstable, too risky and filled with people who are too detached from reality to be left in entirely charge of something as important as the direction of the country’s technological development. This was clearly demonstrated by the frantic, squealing tantrums thrown by tech and VC executives that polluted social media all last week as their primary-residence ivory tower located in downtown Fantasy-Land was suddenly shaken by the tremors of “the situation”. I challenge you to read that article and not get angry at the self-absorbed hypocrisy of these people.
Free-market libertarians, all panic-begging for a bailout (thanks to Barry Ritholtz’s great piece for that gem). Pathetic and embarrassing.
UNDER THE HOOD ..
Recent weeks have brought an accumulation of technical evidence reaffirming the dominant, long term market downtrend. Intermediate and long term market momentum measures started flashing warning signs in mid to late February. preferred
The important measure of the Percent of Stocks Above Their 30-Week Moving Averages plummeted from a multi-year high of 83% on February 2nd, to 53% by March 9th and just 45% on March 16th. This means that the majority of stocks have now returned to their longer term downtrends.
Another disturbing data point is that even the most beaten-down stocks (those the furthest below their moving averages) have been getting sold off. This is not a good sign. In preferable market conditions, you’d expect these stocks to start flickering positively.
Selling Pressure is consolidating its dominance over Buying Power (see LAST WEEK BY THE NUMBERS, below). This is an additional indication of a more sustainable price trend, implying that a further intermediate-term market decline is likely.
A month or so ago, there were a decent number of technical indicators that were supportive of a turnaround and even the possible end in sight of the bear market. Unfortunately, it’s hard to find any of them still left in place and it is becoming more and more difficult to avoid the conclusion that the green of the headline indexes last week is masking a worrying deterioration of the technical condition under the surface of the stock market as a whole.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The absolute main event this week is the Federal Open Market Committee which concludes a two-day meeting on Wednesday afternoon, with an interest rate decision due at 2pm ET. Chair Jerome Powell will hold a press conference 30 minutes later. As of Friday, odds were leaning toward a quarter-point hike (see FEDWATCH TOOL Below). Central-bank watchers will also be gazing across the pond awaiting an interest rate decision from the Bank of England on Thursday.
Treasury Secretary Janet Yellen will testify before Congressional subcommittees on Wednesday and Thursday. She's expected to discuss the recent turmoil in banks, President Biden’s fiscal-2024 budget proposal, and the latest on the U.S. debt ceiling.
There are still a few companies left to report Q4 2022 earnings, including Nike, Adobe, Nvidia, Chevron, Accenture, General Mills, Chewy and Altria.
Amid heightened government scrutiny of TikTok, CEO Shou Zi Chew will testify before Congress next week.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
6.60%
(one week ago: 6.73%, one month ago: 6.32%, one year ago: 4.16%)
Weekly data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months) ..
↑Bullish: 19% (25% a week ago)
→Neutral: 32% (33% a week ago)
↓Bearish: 49% (42% a week ago)
Net Bull-Bear spread .. ↓Bearish by 30 (Bearish by 17 a week ago)
Weekly data courtesy of: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
FEDWATCH TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate) on March 22nd after its next meeting?
No change .. 38%
(one week ago: 0%, one month ago: 0%)
0.25% increase .. 62%
(one week ago: 32%, one month ago: 82%)
0.50% increase .. 0%
(one week ago: 68%, one month ago: 18%)
How does the market view the probability that interest rates (Fed Funds rate, currently 4.625%) will be at/above the following rates at year-end?
At/above 3.50% .. 90%
(one week ago: 100%, one month ago: 100%)
At/above 4.00% .. 34%
(one week ago: 99%, one month ago: 99%)
At/above 4.50% .. 1%
(one week ago: 95%, one month ago: 99%)
Data courtesy of CME FedWatch Tool. Calculated from Federal Funds futures prices as of market close on Friday.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com:
- Last week’s best performing US sector: Technology (two biggest holdings: Apple, Microsoft) - up 5.7% for the week
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 6.7% for the week
- The proprietary Lowry's measure for US Market Buying Power is currently at 142 and rose by 1 point last week and that of US Market Selling Pressure is now at 169 and rose by 12 points over the course of the week.
- SPY, the S&P 500 ETF, is below its 50-day and 90-day moving averages and also below its long term trend line. SPY ended the week 15.4% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now back above both its 50-day and 90-day moving averages and is also above its long term trend line. QQQ ended the week 17.7% below its all-time high (11/19/2021).
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week 0.7 higher at 25.5. It remains above both its 50-day and 90-day moving averages and is also above its long term trend line.
ARTICLE OF THE WEEK ..
The financial graveyard of history is filled with concentrated investors. New plots were just created in that graveyard for Silicon Valley Bank, Silvergate and Signature Bank. A warning that concentration is not your friend when it comes to stocks.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
Financial contagion is the spread of an economic crisis from one market or region to another and can occur at domestic and international levels. The contagion can affect goods and services, labor, and capital goods used across markets connected by monetary and financial systems.
The term was first coined during the 1997 Asian financial markets crisis. The real and nominal interconnections of markets can propagate and even magnify economic shocks, likening the effect to the spread of disease like a contagion.
Financial contagion is defined as a shock that initially affects a few financial institutions and spreads to the rest of the financial system, commonly infecting the economies of other countries. Contagions are typically associated with the diffusion of crises throughout a market, asset class, or geographic region. A similar effect can occur with economic booms. The phenomenon of financial contagion has implications for portfolio management, trading, hedging, and diversification strategies.
Markets in a domestic and global economy are interconnected. From the consumer side, many consumer goods are substitutes or complement one another. From the producer side, the inputs for any business can be substitutes and complements for one another, and the labor and capital that a business requires may be used in different types of industries and markets.
Economies rely on financial institutions to facilitate the flow of goods and services through the economy. Any instability that occurs in these entities can spread throughout countries via the balance sheets of financial intermediaries. Damage to the balance sheet of a bank or leveraged financial institution can trigger a selloff of assets or a recall of cross-country loans.
When markets are fragile, a strong negative shock in one market can not only cause that market to fail but spread damage to other markets and, perhaps, the entire economy. Markets that depend on debt, a specific commodity, or where conditions prevent the smooth adjustment of prices and quantities, entry and exit of participants, and adjustments to business models or operations will be more fragile and less flexible.
With increased global lending through cross-border loans, there is economic efficiency and growth but a higher risk of contagion. Short maturities of bank debt further increase vulnerability. Countries with better-capitalized banking systems that finance credit to a larger degree by deposits have proven less vulnerable to contagion.
The 1997 Asian financial markets crisis, the Great Depression, the financial crisis of 2007-2008, and the COVID-19 pandemic are examples of the effects of financial contagion in an economically integrated global economy.
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