We held our live market update webinar yesterday. To download yesterday’s slide deck, please click here.
- There are after-shocks from the collapse of SVB Financial (aka Silicon Valley Bank). The public remains rattled that a bank like SVB could collapse so quickly.
- And SVB has exposed the operational challenges (deposits vs investments) for banks in a world where central banks have raised rates sharply. And equity and bondholders are wary given FDIC/Fed actions wiped out stakeholders. Worsening this is several rating agencies downgraded regional banks, moving many to below investment grade, which raises these banks cost of funding.
- Bond volatility has surged to highest level since 2009 (ICE MOVE index) and is amplifying stresses across credit and rates markets.
- This has driven an abrupt shift in Fed rate path expectations. Only a week ago, the consensus was Fed path was “higher for longer” and Powell on 3/7 delivered a hawkish message underscoring that point. And Fed futures saw ~5 hikes over next 5 meetings.
- Markets now see ~100bp of cuts post-May and barely 1 hike in total between March/May meetings. The “higher for longer” is dead. That is a huge change in the past week.
- This has created challenges for equity markets in the short-term. Our Head of Technical Strategy, Mark Newton, believes equity markets are bottoming near-term but the next few days are critical to whether this view holds.
- Perhaps the liquidity actions taken by Credit Suisse calm markets, but if not, we expect communication from the Fed. But the next 5 trading days will be key because in this timeframe, we get more Feb inflation/economic data and March FOMC rate decisions.
- Just an anecdotal observation, but the world just seems more prone to panic since the pandemic.
- While the collapse of SVB has triggered logical concerns of contagion, too many investors are reflexively overlaying 2008 GFC. It is the most recent financial crisis and the freshest for many.
- But as inflation surged in 2021-2022, investors were quick to label inflation as an era with risk of inflation being sticky for years. But that analog has not held. Even looking at lagged CPI data, inflation has softened in February compared to January evidenced by the Feb jobs report, Feb CPI and PPI. So the trend remains inflation is softening.
- And the SVB collapse and the associated ripple effects across the start-up community should deliver a softening of the labor market. Moreover, with financial stability more at the top of mind for many, how many employees will now seek raises? Similarly, the credit shock and higher cost of borrowing means credit growth on the margin will slow.
- These are reasons we expect inflation to fall in future months and is also evidenced by Fed rate expectations and the plunge in rates.
- The question is, have rates fallen due to “inflation breaking” or because “economy breaking.” §For reasons noted above, we think this is more “inflation breaking” and thus, Fed can take its foot off the gas. Moreover, the relative resilience of stocks (relatively milder drawdown and the lower amplitude rise in VIX) also suggest to us this drop is inflation.
- Look at Technology, which is asserting its leadership. This would not rise if recession risks are rising.
- The recovery in Bitcoin is another example. Bitcoin is a risk on asset, and with the bank failures of Silvergate, Silicon Valley, Bank, and signature, lost three on ramps for US dollars. Yet bitcoin is trading above its 20 day moving average and at $25,000 as well above its $12,000 Lows and up 48% YTD
- And just because there is financial carnage, including many funds suffering losses, doesn’t mean this episode has to turn into a financial crisis and recession. But action by the Fed is key.
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37 Granny Shot Ideas: We performed our quarterly rebalance on 1/30. Full stock list here –> Click here
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