The S&P 500 ended the week, month and quarter sitting almost exactly in the middle of its range over the last year and a strange calm seems to have descended upon markets. No scary news from the banking sector last week allowed investors to focus on other things, such as earnings and economic releases, which were mostly pretty good.
Traders started the week with a smile on their faces as they learned that First Citizens BancShares (FCNCA), a North Carolina-based regional bank, had agreed to take over substantially all of the assets and liabilities of collapsed Silicon Valley Bank (SVB).
The big economic news of the week was the release of the Personal Consumption Expenditures (PCE) Price Index. This is the inflation reading that the Fed trusts for measuring inflationary pressures even more than the Consumer Price Index (CPI) as it believes it more closely tracks spending decisions by US consumers and therefore, in many ways, it’s a more important measure when it comes to assessing the Fed’s position.
The PCE index rose 0.3% last month, less than the 0.5% expectation and well down from the 0.6% rise in January. On an annual basis, the index was up 5.0%, decelerating from 5.3% the month before. The important Core PCE Price index, which excludes volatile food and energy costs, was up 0.3% last month and is now down to 4.6% year-over-year, below the level of short term interest rates for the first time in a long time.
These numbers were all regarded as very positive and boosted optimism that the Fed might be able to pull back on their aggressive efforts to fight inflation with a possible pause next time out in May and even possible rate cuts before year-end, although Fed officials continue to deny that such rate cuts are even under consideration. It should be pointed out, however, that this data does not reflect any economic slowdown or tightening of credit conditions resulting from the bank chaos of the last two or three weeks.
This is the fear for the economy; a mini credit-crunch for corporate America (particularly small and mid-size firms), brought about by tighter lending controls instigated by the spooked banks themselves, but also coming down from the regulators.
A brief explainer/reminder of how we got here:
If you were a bank like SVB, you decided to own longer maturity 100% credit-secure US Treasury bonds that you had priced on your balance sheet as if you were going to hold them till the maturity of the bond. The fact that the current re-sale market prices of these bonds had dramatically fallen in value as interest rates have moved back higher didn’t really matter if you are going to hold on to them for their entire duration, as was the original plan, since you weren’t going to be selling them at that current price. If you aren’t selling them, why would you care what the going price is for these bonds?
Until suddenly your customers are pulling their deposits out for a variety of reasons ranging from the implosion of crypto, newly-expensive borrowing costs, VC money drying up, margin calls (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) on huge losing stock positions in tech/growth stocks - whatever it may be. And the only way to have enough money to fulfill those withdrawal obligations is to actually sell these bond assets in advance of their maturity, something you never planned to do. And all of a sudden, that much lower current price for these assets really does matter!
You are now losing millions upon millions of dollars in hours and days versus what your accountants valued the assets at, as those previously unconcerning paper losses suddenly become real losses. The rest of your customers see what’s happening and self-preservation takes over and they pull their deposits too. And so the death-spiral begins.
The reason the market responded so well to the simple fact that things didn’t get noticeably worse in the banking sector last week is because it is really, really, really important that First Republic (FRC) and any of the other at-risk regional banks like PacWest Bank (PACW), Comerica (CMA) and Zions Bancorporation (ZION) do not fail or become forcibly absorbed by a big box bank. If that happens, contagion will be confirmed and all bets are off.
And then where would the next problems become apparent? Keep half an eye on commercial real estate if that happens. In fact, come to think of it, keep half an eye on commercial real estate anyhow.
But a sense began to emerge last week that perhaps that bullet might have been dodged with no further meaningfully damaging news coming out of the sector.
The Trump circus is being completely ignored by markets and will continue to be unless something highly dramatic comes out of left field, which of course cannot be ruled out.
The short term major market focus is (in order):
* Is there an extended banking crisis?
* Will the Fed cut rates before year-end?
* Will there be a recession?
* What’s happening to inflation?
Last week, the market’s responses felt like:
* We increasingly think probably not.
* The Fed says no, we think yes.
* Maybe, maybe not - but even if there is one, it might be mild and short.
* It may be sticky in parts, but it is generally moving steadily lower.
These sentiments can change very fast from week to week obviously, but by Friday they had contributed to positive end to the day, week, month and quarter (I’ll be publishing my quarterly market review sometime this coming week).
OTHER NEWS ..
Crypto alert .. The Securities and Exchange Commission (SEC) last week issued an official warning to investors on the risks of investing in crypto asset securities. It stated what has become blindingly obvious, that crypto investments are highly volatile and speculative and that the platforms that provide them may not have the necessary protections for investors. Additionally, companies offering crypto asset investments may not comply with federal securities laws. The SEC also urged investors to exercise a lot of caution when relying on Proof of Reserves, a method used by crypto asset entities to supposedly offer evidence that they have sufficient reserve assets to cover customers' balances.
The SEC emphasized the other undeniable point that registration by entities such as Registered Investment Advisors (RIAs, like Anglia Advisors) provides important protections for investors and, conversely, unregistered entities that deal in crypto have no such protections.
The meh-taverse .. Disney last week entirely shut down the internal division that was developing its metaverse strategies. Microsoft recently permanently closed down a social virtual-reality platform that it acquired to a big fanfare in 2017. Even Mark Zuckerberg, who not long ago bet the entire farm on the metaverse, recently cut several positions and projects in Meta/Facebook’s metaverse division and focused far more on artificial intelligence (AI) on the most recent earnings call last month during which the buzzword-mention score was: AI 28, metaverse 7.
Meanwhile, the price for virtual real estate in some online worlds, where users can hang out as avatars, has completely cratered - to the surprise of almost no-one inhabiting planet Earth. Apparently, the median sale price for land in Decentra-land (yes, there is such a virtual place!) has declined 90% from a year ago.
College isn’t worth the cost, say the majority of Americans .. A Wall Street Journal survey found that 56% of Americans now think earning a four-year bachelor’s degree is a bad financial bet, up from 40% in 2013 and a new low in confidence in the monetary value of a college education. There’s a significant divergence in respondents from different age groups and skepticism is strongest among people ages 18-34. Also, the opinions of people who themselves do hold college degrees have soured the most over the last decade.
UNDER THE HOOD ..
The technical state of the market is far more precarious than is implied by the increasingly positive market sentiment described above.
The “no-man’s land” I mentioned in last week’s report with price and indicators very much in the middle of their respective ranges and apparently going nowhere, is proving to be a problem with elevated risk for bulls and bears alike.
The indicators are not oversold enough to yet reflect the necessary exhaustion of Supply, yet they are not above key thresholds to imply the return of enthusiastic Demand. Indeed they are not even close to any of these levels. They just, are.
Even short-term trends in Buying Power and Selling Pressure are not helping. Over the past few weeks, both indexes have stopped moving in equally contrasting directions to each other, with unfavorable trends for both having been in place since early February.
In traditional technical analysis, trends are presumed to remain in force until reversed. We got partial proof of a strengthening market in late January, when many favored indicators, including market breadth, broke through their prior highs. However, when we had rebounded off the lows back in October 2022, there was (as discussed extensively in this report at the time) insufficient technical evidence that the major trend had turned, and therefore the prior cautious posture remains in place, despite January’s temporary spike in technical positivity.
The best we can say about the market now is that there is no trend, as stocks, on average, are making no net progress in the middle of a wide trading range. It can certainly not be not ruled out that the stock market will re-visit those October lows, which is the the bottom of that range.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The upcoming holiday-shortened trading week (US stock markets will be closed on Friday for Good Friday, while bond markets will have themselves a half-day) will see a few major economic-data releases, headlined by the all-important Jobs Report which will still come out on Friday morning, in spite of the stock market being closed that day. Consensus estimates are for a 200k increase in US jobs created in March and for the unemployment rate to remain unchanged at 3.6%.
The Job Openings and Labor Turnover Survey (JOLTS) on Tuesday is expected to show 400k fewer job openings, down to 10.45 million as of the last business day of February.
This week's corporate calendar is quiet, before JPMorgan Chase, Wells Fargo and Citigroup all kick off Q1 2023 earnings season the following week.
While we await that, we have investor events from from Walmart, FedEx and Waste Management to keep us occupied.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
* 6.32%
(one week ago: 6.42%, one month ago: 6.50%, one year ago: 4.67%)
Weekly data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months) ..
* ↑Bullish: 22% (21% a week ago)
* ↔ Neutral: 32% (30% a week ago)
* ↓Bearish: 46% (49% a week ago)
* Net Bull-Bear spread .. ↓Bearish by 24 (Bearish by 28 a week ago)
Weekly data courtesy of: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
FEDWATCH TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate) on May 3rd after its next meeting?
* ↔ No change .. 52%
(one week ago: 80%, one month ago: 0%)
* ↑ 0.25% increase .. 48%
(one week ago: 20%, one month ago: 73%)
How does the market view the probability that interest rates (Fed Funds rate, currently 4.875%) will be at/above (≥) the following rates at year-end?
* ≥ 4.00% .. 96%
(one week ago: 38%, one month ago: 100%)
* ≥ 4.25% .. 77%
(one week ago: 10%, one month ago: 100%)
* ≥ 4.50% .. 46%
(one week ago: 3%, one month ago: 100%)
* ≥ 4.75% .. 14%
(one week ago: 0%, one month ago: 99%)
Data courtesy of CME FedWatch Tool. Calculated from Federal Funds futures prices as of market close on Friday.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com:
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - up 6.3% for the week
- Last week’s worst performing US sector: Healthcare (two biggest holdings: UnitedHealth Group, Johnson and Johnson.) - up 1.9% for the week
- The proprietary Lowry's measure for US Market Buying Power is currently at 171 and rose by 19 points last week and that of US Market Selling Pressure is now at 151 and fell by 18 points over the course of the week. Buying Power last week moved back into a dominant position over Selling Pressure.
- SPY, the S&P 500 ETF, now sits well above its 50-day and 90-day moving averages and its long term trend line. SPY ended the week 14.3% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains way above its 50-day and 90-day moving averages and its long term trend line. QQQ ended the week 20.6% below its all-time high (11/19/2021).
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week 3.0 points lower at 18.7. It is now well below its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK ..
The biggest mistake in investing.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
A margin call occurs when the percentage of an investor’s equity in a margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with a combination of the investor’s own money and money borrowed from the investor’s broker.
A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that the value of the investor's equity (and the account value) rises to a minimum value indicated by the maintenance requirement.
A margin call is usually an indicator that securities held in the margin account have decreased in value. When a margin call occurs, the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account.
What triggers a margin call? .. When an investor pays to buy and sell securities using a combination of their own funds and money borrowed from a broker, the investor is buying on margin. An investor’s equity in the investment is equal to the market value of the securities minus the borrowed amount.
A margin call is triggered when the investor’s equity, as a percentage of the total market value of securities, falls below a certain required level (called the maintenance margin).
The New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA)—the regulatory body for the majority of securities firms operating in the United States—each requires that investors maintain an equity level of 25% of the total value of their securities when buying on margin.23 Some brokerage firms require a higher maintenance requirement, sometimes as much as 30% to 40%.
Margin calls can occur at any time due to a drop in account value. However, they are more likely to happen during periods of market volatility.
How to avoid a margin call .. Before opening a margin account, investors should carefully consider whether they really need one. Most retail investors don't ever need to buy on margin to earn solid long term returns [note; it is always my recommendation that no client of Anglia Advisors ever use margin].
It is certainly riskier to trade stocks with margin than without it. This is because trading stocks on margin is trading with borrowed money. Leveraged trades are riskier than unleveraged ones. With margin trading, investors can lose more than they have invested. Besides, the loans aren't free. Brokerages charge interest on them.
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