Against the backdrop of the second- and third-largest bank failures in U.S. history, the market was all over the place in both directions before ending mixed to mostly lower.
The Dow began with a terrible decline of 285 points before getting the muster to rally to a 331 point gain in mid-morning before making a very late fade to end with a closing decline of 90 down to 31,819 for its fifth straight lower session. It was hurt on the downside by selling in financial components such as AXP, GS, JPM and TRV on the fallout from the troubles in the smaller banks.
The S&P started out even worse with a really awful 53 point downside shellacking before it had the nerve to rally to a 44 point gain also in mid-morning. It also made a very late fade to end nominally lower by 6 to 3855.
The Nasdaq held up better on the plunge in interest rates which do not hurt technology stocks as much and it ended with a 50 point gain, also off of its best intraday levels with gains in AAL, META, MSFT and TSLA helping to keep it afloat.
The Russell 2000 Index of small stocks was a complete basket case again and ended lower by 28 down to 1744 hurt by the presence of those small regional banks, which got clobbered again.
This led to the VIX ending higher at 26.52 but it had been briefly over 30 due to that awful start to the S&P as mentioned above.
The only redeeming factor here was the extremely sharp decline in market interest rates which will obviously prevent the Fed from being so aggressive at next week’s meeting where the consensus if for either a 25 point move or perhaps nothing at all.
Investors are concerned that the previous relentless rise in interest rates meant to get inflation under control are approaching a tipping point and may be badly hurting the banking system as the government announced a plan late Sunday meant to increase confidence in the banking system following the collapses of Silicon Valley Bank and Signature Bank since Friday.
The most pressure is on the regional banks a couple steps below in size of the massive, “too-big-to-fail” banks that helped take down the economy in 2007 and 2008. Shares of First Republic Bank (FRC) fell by 62% even after the bank said on Sunday it had strengthened its finances with cash from the Federal Reserve and JPM.
The largest banks, which have been repeatedly stress-tested by regulators following the 2008 financial crisis, weren’t down as much.
This idea of either 25 points or nothing at all next week would be a sharp turnaround from expectations just a week ago, when many traders were forecasting the Fed could go back to increasing the size of its rate hikes to 50 points. The fear was that stubbornly high inflation would force the Fed to get even tougher, and investors were bracing for the Fed to keep hiking at least a couple more times after that.
Now, depending on reactions in financial markets and eventual fallout on the overall economy, there is still the outside possibility that the hiking cycle could even be over and that the next move by Fed officials may be lower not higher. This line of thought is still a stretch.
The Fed has already hiked rates at the fastest pace in generations and made other moves to reverse its tremendous support for the economy during the pandemic. This has effectively drained cash from the system, and restoring liquidity in the banking system is easier than restoring confidence, and yesterday it was more about the latter than the former.
Prices for Treasurys shot higher as investors sought safety and as their expectations grew for an easier Fed, which sent yields lower as for instance the 10-year Note plunged to 3.54% from 3.70% late Friday. The 2-year yield, had an even more breath-taking drop as it fell to 3.99% from 4.59% Friday. It had been above 5% earlier this month.
Earnings this week will see: Tuesday – LEN higher; Wednesday – ADBE; Thursday – DG and FDX.
Economic reports will have: Tuesday – February C.P.I. rose by 0.4% and 6% year over year and the core rate excluding food and energy was higher by 0.5% and up by 5.5% year over year, February small business optimism index increased to 90.9 but was still lower than average (98) for the 14th straight month; Wednesday – February retail sales, NAHB March Housing Market Index; Thursday – weekly jobless claims; Friday – mid-month U. of Michigan Consumer Sentiment Survey.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.