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.
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.
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.
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.
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.
Patience, not panic! Rules, not emotion!
May the markets be with us,
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