Market Commentary — March 20, 2023
Stocks were mixed last week as interest rate and growth expectations shifted in the wake of banking turmoil. And the key question is, that in light of the banking crisis, will the Fed take its foot off the tightening gas pedal or even put its foot on the brake?
Sector returns within the S&P 500 Index varied widely, with communication services and tech shares posting strong gains, while financials and energy shares suffered significant losses. Mega-cap tech names that generate significant free cash flow with minimal exposure to the regional banks performed especially well, and large-cap growth stocks outperformed their value counterparts by 580 basis points!
Rightly, Friday’s Silicon Valley Bank (SVB) failure and the closure of New York’s Signature Bank, another bank with heavy exposure to crypto customers, sparked concern about a wave of new collapses. The Fed, the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department announced on Sunday, March 12, that all SVB depositors would have full access to funds on Monday morning, while the Fed made additional funding available to banks to safeguard deposits and prepared to address any potential liquidity pressures.
During the week, more intervention actions occurred. First Republic was aided by a group of banks with $30 billion in deposits to help build confidence in the banking system, and give it a lifeline while it seeks a buyer. Credit Suisse required an infusion of more than $50 billion from the Swiss National Bank. And on Friday, SVB Financial, the former parent of Silicon Valley Bank, filed for Chapter 11 bankruptcy protection.
All of this has caused a massive reset of interest rates and economic growth projections. By the end of the week, futures markets were pricing in zero likelihood of a 50-basis-point hike according to CME Group data. Markets were also placing a roughly 39% chance on the Fed keeping rates steady at its upcoming meeting on March 21–22. There is now nearly a 99% probability that the federal funds’ target rate would end the year lower than its current range of 4.50% to 4.75%.
The inverted yield curve is now much less inverted, hitting its lowest level since September 2022, posting its biggest drop since 1987’s Black Monday stock market crash. The yield on the 2-year Treasury fell more than 28 bps to 3.824% and the yield on the 10-year Treasury declined 18.5 bps to 3.430% as of Friday, shrinking the spread to less than 0.40%. While none of this bodes well for a recession, it has improved the outlook for stocks in a lower-cost-of-capital environment.
Other than investors using ETFs as vehicles to quickly pivot and rapidly re-adjust expectations, there was not too much new in ETF land. ETF flows shifted from the short-term to the intermediate part of the yield curve. In new ETF news, JP Morgan launched an Active China ETF.
All eyes will be on the Fed meeting next week, with the fate of many banks, hanging in the balance.
CEO and Co-Founder
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