Stocks Gain Despite Bank Woes; Bonds Rally
In a volatile week, the markets finished mixed with the Dow (-0.1%), NASDAQ (+4.4%), and the S&P 500 (+2.4%). Meanwhile, bonds rallied sharply with taxable bonds gaining about 1.4% and tax-free municipal bonds gaining about 0.8%. The bond rally resulted in the 10-year Treasury yield dropping all the way down below 3.4%, when that yield was pushing 4% only about one week earlier.
Several important key economic data were reported last week, but nearly all of it was overshadowed by the bank failures. Off the heels of the Silicon Valley Bank and Signature Bank failures the prior weekend, First Republic Bank got a $30 billion cash infusion from other large banks, and Credit Suisse Bank was rescued by UBS in a buyout after the week ended. The banking sector dropped over 6% last week, dragging the Dow down with it. Meanwhile, the NASDAQ, which holds very little banks, rallied with the drop in interest rates. While most pundits believe that these bank failures are not widespread, the headlines certainly warrant some attention from the public. The Fed has guaranteed that depositors will not lose any money, even if their deposits exceed the FDIC limit of $250,000. This was done in an attempt to relieve the public of concerns with the overall banking system, and to avoid the proverbial run on the banks like what occurred in the Great Depression a century ago.
The economic data reported last week certainly was not good. Leading economic indicators (LEIs) declined further, and in conjunction with the inverted yield curve, these are two historically accurate predictors of a forthcoming recession. See the attached document which shows a chart of interest rate spreads in blue, as the blue line falling negative has historically been followed by a recession shown by the shaded region. A similar chart was provided a few months ago showing the relationship between LEIs and recessions. The Consumer Price Index (CPI – a leading measure of inflation) fell from January, but only marginally, demonstrating that above average inflation persists. Meanwhile, the Producer Price Index (PPI) fell slightly in February, along with retail sales. These two reports demonstrate that the interest rate hikes over the past year are showing signs of slowing the economy.
Lastly and certainly not least important, the Fed is scheduled to meet this week to potentially raise interest rates again. Notice the word “potentially”? Prior to the bank failures, it was a question of whether the Fed would raise rates by 0.25%, or 0.5%. Now, it’s a question of whether they will raise rates at all. Plus, the bond market is pricing in rate cuts in each of the following three Fed meetings over the next 5 months. What a reversal!! If the Fed comes through and lowers rates this soon, that will come as a surprise to me, but will likely be met favorably from the stock markets. Given the inflation numbers, it seems hard for me to believe the Fed will be cutting rates, but the bond market is certainly smarter than me
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