“LUKE, WE’RE GONNA HAVE COMPANY!” Han Solo
Turmoil in the banking sector has left many investors with flashbacks to 2008’s GFC and even the 1980s savings and loan crisis, though some–including our Head of Research, Tom Lee–attribute this to reflexive human nature rather than any significant similarities to those historic events. Nevertheless, fallout from last week’s rapid collapse of Silicon Valley Bank $SIVB spread throughout global markets this week, with Credit Suisse’s separate issues (problematic accounting among them) adding to the uncertainty.
Politically, $SIVB has generated a bipartisan perspective in Congress–aimed at the Fed. Lawmakers from both parties are questioning why the Fed failed to see trouble at the failed bank earlier or act to prevent it, with some noting that until March 10, SIVB CEO Greg Becker sat on the board of the San Francisco Fed. Still, our Washington Policy Strategist, Tom Block, said that while Congress will certainly respond to recent banking news, the debt-ceiling debate remains top-of-mind in Washington, D.C.
But at our office, the banking sector was a ubiquitous topic of discussion this week. In his webinar on Thursday, Tom Lee said that his 2023 outlook remained positive and unchanged. However, he acknowledged that in the unlikely event that the current turmoil is not contained, it has the potential to alter his outlook for the rest of the year. Lee said the next five trading days (i.e. until March 23) are critical, as markets see how the banking crisis unfolds, get more February inflation/economic data, and take in the March FOMC rate decision.
During our research huddle following the webinar, Brian Rauscher, Head of Global Portfolio Strategy and Asset Allocation, agreed with Lee’s assessment of the banking crisis: “At the moment, it appears that direct contagion is not happening. I am not expecting a domino effect leading to a financial crisis,” he said.
But Rauscher warned, “We are not totally out of the woods yet. The smart money is still digesting the rescue of First Republic. There are likely a lot of idiosyncratic issues out there that have not shown their ugly heads yet, and a lot of banks have the same deposit-flight problem that hit SVB and SBNY. Other dead bodies will likely float to the surface in the months to come.” Asked whether there was any opportunity to be found in the sector, he described the situation as “tricky.” He explained, “Right now we’re in this random phase where a dead body could show up at any moment, and that could take the entire group down.”
Mark Newton is slightly more sanguine about the banking sector, though not confident. “From a technical perspective, a lot of banks have gotten down to levels low enough to at least consider a trade. U.S. banks are far better capitalized and better structured than European banks,” our Head of Technical Strategy noted. “There are many banks that have great liquidity that have been unfairly punished,” Newton said, pointing out that $SIVB was an unusual case: “They didn’t have a risk officer for eight months and they clearly didn’t take any steps to hedge any of their holdings.”
Here’s a look at the Fear & Greed Index, which shows that fear hasn’t been this high since near last fall’s market lows:
Regarding the broader market, Newton observed that although the indices held up this week, “the broader market has actually seen a lot of technical damage. If you look at Energy, Financials, Materials, and Industrials, they’ve all obviously been very very hard hit. It is going to be important to recoup that and start to have a very strong rally off these lows.”
That could happen, he noted. “I’ve argued that the back half of March is normally much, much better for markets. They typically bottom on the 10th trading day of the month, which is this week.”
Newton credited large-cap technology for supporting the S&P 500 and Nasdaq benchmarks this week. “Tech is 27% of the market. Apple is 7% of the S&P. You’re seeing a lot of good movement in technology.”
Lee observed: “Tech is close to erasing all of the underperformance in 2022. If you thought tech was terrible in 2022 and you just held on, you’re almost back to where we started.” From a broader market perspective and beyond the short term, Lee remains optimistic, citing the market’s resilience this month even in the face of the bank crisis and Fed Chair Jay Powell’s hawkish testimony earlier in March, with the SPX flat for the month.
“The trend remains: Inflation is softening,” Lee concluded.
French President Emmanuel Macron used a constitutional provision to force his pension-reform bill through the lower house of Parliament, where it faced a long-shot struggle. The bill, which raises the retirement age from 62 to 64 to reduce the massive liabilities of France’s generous retirement benefits system, was hugely unpopular nationwide. As intense protests–some violent–flared up across the country, multiple political parties have filed a motion for a no-confidence vote in Macron’s government. A successful no-confidence vote, likely next week, is the only way to stop the bill from becoming law.
China’s January-February economic data showed accelerating growth post-lockdown, with industrial production up 2.4% compared to December’s 1.3%. Retail sales were up 3.5% compared to -1.8% in December. Unemployment overall came in at 5.6%, but youth unemployment (16-24 years old) remained high, rising to 18.1% over 16.7% in December. (The country releases January and February data together to avoid misleading distortions due to the Chinese New Year holiday.)
The European Central Bank raised interest rates by 50 bps to 3%, judging that the EU banking sector was sufficiently “resilient” to withstand the central bank’s efforts to lower inflation. It was the ECB’s sixth consecutive rate hike since July 2022.
Argentina’s YoY inflation rose above 100%, climbing to 102.5% in February. It was the first time inflation had breached the 100% mark since 1991.
The UK Office for National Statistics updated the basket of products and services used to calculate inflation. Going forward, the prices of digital cameras and non top-40 compact discs (CDs) will no longer impact inflation in Britain, while the prices of items like soundbars, video doorbells, and e-bikes will be used in the calculations.
And finally: Road fatalities in the U.S. are up 22% since 2019, and experts attribute much of that increase to distracted driving due to smartphone use. Please stay safe.
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