A True Rebound or a Head Fake?
Apr. 5, 2023

Markets Rebound Following Bank Failures

Last month the failure of Silicon Valley Bank, Signature Bank, and Credit Suisse rocked the markets. A widely reported March 13 study by four economists revealed that a further 186 banks remained vulnerable to a run on deposits. Days later, fear subsided as generous deals were made to First Citizens Bank, Flagstar Bank, and UBS to buy out the troubled banks. Although shareholders were wiped out, depositors of any amount were made whole. The actions taken appear to have quelled fears of a broader bank-run contagion.

SPDR S&P 500 ETF line graph

A True Rebound? Or, A Head Fake?

Despite the Fed’s best efforts, inflation remains high, jobs plentiful, spending brisk, and earnings fairly stable. Many economists have pointed to the trillions injected into the economy and accounts of individuals as the reason stocks have held up. It has been suggested that it will take a few more months of higher rates and quantitative tightening to reduce the money supply before inflation can be responsive. However, this has generally resulted in lower sales, lower earnings, lower markets, and layoffs – AKA recession.

SPDR S&P 500 ETF line graph #2

StormGuard Barely Remains Bullish

Last month I suggested that even though StormGuard had risen precipitously in the past few weeks in response to the bear market rally, it could – and likely would – run its course in the next 30 to 90 days. I also wrote that the number of missed earnings reports and guidance downgrades will likely slowly increase until both the economy and stock valuations decline commensurately. I further expected StormGuard to stay near its trigger threshold during this period and be ready to signal a change – and it has remained in the zone.

Stormguard - Armor Indicator for Match 31st, 2023

Sticky Inflation – Not Abating

The Fed’s favorite measure of inflation excludes food and energy (chart, right) because they are often transitory and sometimes reverse in line with associated commodities. However, inflation of wages, services, etc., generally do not reverse themselves. Clearly, sticky inflation appears to have taken root. In our February Newsletter, it was shown that in past periods interest rates as high as the inflation rate were required to reliably bring down inflation.

The Fed is committed to avoiding stagflation by being sufficiently aggressive with its tools. However, raising rates aggressively has already broken a few banks. Raising rates a few points higher might break quite a few more banks. It’s said that zombie companies will be the next casualties – companies with heavy debt loads that are unable to afford paying significantly higher rates when their loans renew.

Chart: Sticky Price Consumder Price Index, less Food and Energy. On this line graph, the Y-axis measures "percent change from a year ago" and the X-axis measures year 2018 through 2023. There is a sharp rise in the graph mid-2021 from 2-3% up to nearly 7%.

Sticky Price Inflation Not Abating

The Fed’s Crash Record

The chart (right) chronicles market declines following the start of Fed funds rate cuts. Street wisdom says that when rates are cut the markets will soar – but the opposite is true. By the time the Fed decides to cut, the recession is baked in the cake. However, the good news will be that bonds and treasuries should benefit handsomely from the rate reductions.

Chart: Fed Funds Rate Cuts and Max Drawdown S&P 500.
Market Losses Following Interest Rate Declines

Patience, not panic! Rules, not emotion!

Photo of Scott

May the markets be with us,

Scott Juds
Chairman & CEO of Merlyn.AI Corporation and President & CEO of SumGrowth Strategies

Investing involves risk. Principal loss is possible. A momentum strategy is not a guarantee of future performance. Nothing contained within this newsletter should be construed as an offer to sell or the solicitation of an offer to buy any security. Technical analysis and commentary are for general information only and do not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual. Before investing, carefully consider a fund’s investment objectives, risks, charges and expenses, and possibly seeking professional advice. Obtain a prospectus containing this and other important fund information and read it carefully. SumGrowth Strategies is a Signal Provider for its SectorSurfer and AlphaDroid subscription services and is an Index Provider for funds sponsored by Merlyn.AI Corporation. SumGrowth Strategies provides no personalized financial investment advice specific to anyone’s life situation, and is not a registered investment advisor.

Article by Scott Juds
Chairman & CEO of Merlyn.AI Corporation and President & CEO of SumGrowth Strategies

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