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Weekly Market Review
Summary:
This week was a volatile one, mostly in the middle of the week, leaving the first and last days ending pretty firmly in place.
Over the weekend, we got news that the Swiss National Bank brokered a UBS ($UBS) acquisition of Credit Suisse ($CS) for a price of $3.2 billion. The Federal Reserve also announced coordinated action with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to enhance US dollar liquidity and assure that “the capital and liquidity positions of the US banking system are strong, and the US financial system is resilient.”
Early in the week, we received Treasury Secretary Yellen’s remark for the American Bankers Association that the government is prepared to intervene again “if smaller institutions suffer deposit runs that pose the risk of contagion.”
Many of the beat-up bank stocks moved higher in the first half of the week as we awaited the FOMC decision on Wednesday, which brought sharp declines at the index level that day.
The FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 4.75-5.00% and the updated Summary of Economic Projections showed the Fed’s median terminal rate of 5.10%. Stocks initially ran on this news before flipping lower as Fed Chair Powell gave his press conference.
Powell acknowledged that the Fed does not anticipate rate cuts this year. He believes that the events in the banking system do not help the possibility of a soft landing for the economy.
All together, Powell was neither super hawkish nor dovish. He did not sound particularly confident in the outlook either.
More central banks followed later in the week. The Bank of England announced a 25-bps hike and hinted at more increases in the future while central banks from Switzerland, Norway, Hong Kong, and Philippines also raise their rates.
By the end of Friday, price action suggested that the market had shaken off some of these concerns. The main indices closed the higher despite sharp declines in Europe’s indices.
The Treasury market was also volatile this week. Ultimately, the 2-yr note yield fell 5 basis points this week to 3.77% and the 10-yr note yield fell 2 basis points to 3.38%.
Only 2 S&P 500 sectors finished the week red– real estate ($XLRE -1.99%) and utilities ( $XLU -1.91%) — while the communication services (+3.4%), energy (+2.3%), and information technology (+2.0%) sectors saw the biggest gains.
Monday:
The stock market kicked off the new week with a reversal from the end of last week. Banks showed nice strength on the news over the weekend of the Credit Suisse acquisition.
Additionally, the Federal Reserve announced the coordinated central bank action enhance the USD assure that “the capital and liquidity positions of the US banking system are strong, and the US financial system is resilient.”
Still, some concerns around the banking industry persist, as seen in the decline of First Republic Bank ($FRC). The SPDR S&P Bank ETF ($KBE), which was up 4.5% at its high Monday morning, closed with a smaller 1.6% gain and the SPDR S&P Regional Bank ETF ($KRE), which was up 4.9% at its best level of the day, was up 1.2% by the close.
$FRC’s debt was downgraded at S&P to B+ from BB+. There was some minor easing as there were rumors that Jaime Dimon was leading talks with other banks to convert $FRC deposits into a capitl infusion, however, FRC closed near its worst levels of the day.
There was no major economic data releases on Monday.
Tuesday:
The stock market continued strength on Tuesday after Monday had closed above its 200 day SMA. With Tuesday’s move, the S&P 500 regained all the ground that had been lost since March 8 when the SVB Financial blowup started to hit the scene.
Banking stocks led the charge after a Bloomberg report indicated the Treasury Department is looking at ways to guarantee all bank deposits without congressional approval.
Some of the names that had suffered the steepest losses traded up Tuesday. The SPDR S&P Bank ETF ($KBE) rose 5.3% and the SPDR S&P Regional Banking ETF ($KRE) rose 5.8%.
The S&P 500 pushed above its March 8 close after the start of trading before pulling back some and trading in a narrow range throughout most of the session until a late afternoon lift had the indices close near their best levels of the day. The S&P 500 closed above the 4,000 level to lead into the FOMC’s rate hike decision the next day
For economic data on Tuesday we received the home sales reading.
Existing home sales jump 14.5% MoM in February to a seasonally adjusted annual rate of 4.58 million versus an unrevised 4 million in January. Sales increased on a MoM basis in February for the first time in 13 months. Total sales in February were down 22.6% from a year ago.
The key takeaway here is that the median selling price fell for the first time in 11 years, underscoring the affordability challenges caused by rising mortgage rates and prospective buyers’ concerns about making a purchase at the top of the cycle.
Wednesday:
The majority of Wednesday was chop while we waited for FOMC policy decision and Fed Chair Powell’s press conference. The main indices ultimately closed the session sharply lower.
The FOMC voted unanimously to raise rates by 25 basis points. The language of the meeting and the Summary of Economic Projections looked as if the Fed is going to entertain the idea of pausing its rate hikes soon.
That view prompted a knee-jerk reaction upward in stocks the release. However, this sentiment flipped as Powell was speaking. Broad based selling interest came in and crushed last hour of the day.
All together, Mr. Powell did not sound especially hawkish or dovish. Importantly though, he did not sound particularly confident in the outlook either and I suspect that lack of confidence played a part in the lack of confidence that led to the selling during his presentation.
For Wednesday’s economic data we had the Weekly MBA mortgage application index and the Weekly EIA Crude Oil Inventories.
The MBA index rose 3% with refinancing applications growing by 5% and purchase applications rising 2%. The oil inventories showed a draw of 1.06 million barrels following a build of 1.55 million.
Thursday:
The market started strong, recovering some of the sharp declines from Wednesday. The upside momentum started to fade, though, after the S&P 500 briefly tipped above the 4,000 level at its high for the day.
The markets remained green until an uptick in selling interest dragged it into negative territory in the late afternoon. Ultimately, the main indices closed in the green, but far off their highs for day.
Investors were still digesting the Fed’s latest rate hike and commentary from Fed Chair Powell on Thursday along with multiple rate hikes from central banks overseas.
Initially, buying interest was broad with mega cap stocks in a leading position. By the close, most mega cap stocks stayed strong while the broader market deteriorated. The Vanguard Mega Cap Growth ETF ($MGK) was up 1.1% versus a 0.3% decline in the Invesco S&P 500 Equal Weight ETF ($RSP).
For economic data on Thursday, we received the Initial jobless claims report for the week, the Q4 current account balance, and the new home sales report.
The initial jobless claims report for the week ended March 18th fell by 1,000 to 191,000 compared to a 204,000 consensus, while the continuing jobless claims for the week ending March 11ths increased by 14,000 to 1.694 million versus consensus of 1.684 million. The takeaway here is that initial claims remain low, pointing to little change in the health of the labor market, something that the Fed is watching closely.
The Q4 current account balance rose to -$208.6 billion from -$219 billion.
New home sales increased 1.1% MoM in February to an annual rate of 640,000 units from 633,000 in January. On a year-over-year basis new home sales were down 19%. The takeaway here is that sales has moved up for the 4th time in the last 5 months.
Friday:
The stock market closed out the week on an upbeat note, but things didn’t start out that way. Initially, investors were weighing concerns about the banking industry, again, after reports indicated that Deutsche Bank’s ($DB) cost of default insurance jumped to a four-year high.
German Chancellor Scholz and European Central Bank President Lagarde both attempted to calm markets after the news, but stocks were still under pressure despite their efforts. The S&P 500, which fell below its 200-day moving average after the open, was down 1.0% and hit 3,909 at its low for the day. The Nasdaq and Dow were down 1.0% and 0.9% at their lows for the day.
The tone in the market shifted around the time that European markets closed. The tonal shift also coincided with buying interest in the Treasury market subsiding.
Many stocks moved higher with Friday’s rally, which saw the S&P 500 close above its 200-day moving average. The Invesco S&P 500 Equal Weight ETF ($RSP) was up 0.9% while the market-cap weighted S&P 500 had a gain of 0.6%.
Economic data for Friday included the Durable goods orders and the IHS Markit Services PMI.
Durable goods orders fell 1% MoM in February versus an expected 1.6%. Excluding transportation, durable goods orders were flat MoM following a downward revised 0.4% increase form 0.7% in January. The key takeaway is that the report could bring in questions about the strength of the manufacturing sector since it showed an unexpected decline in orders while the January numbers were also revised lower.
The IHS Markit Services PMI rose to 58.3 in the early March reading versus 50.6 in the last reading. The manufacturing PMI rose to 49.3 versus 47.3 last time.
Dividend Dollars’ Outlook & Opinion
That’s it for the recap. Now for my opinion!
This was a slightly last week for economic data with the exception of the FOMC rate decision. Initial jobless claims came in lower than expected. Claims have been averaging below 200k for nine straight weeks, showing that the labor market is still very strong, which gives the Fed more ammo in terms of potential continued rate hikes.
The rate hike this week was the 9th consecutive hike since tightening began 12 months ago, for a total of 4.75% in increases. The Fed’s balance sheet reduction continues at $9B per month. This lead to another volatile week in the Treasury market and the stock market.
Right before the hike was announced, the probability of this weeks 0.25% hike was at 82%. For the 8 years in which data is available, whenever the probability exceeds 65% going into a Fed meeting, the expected move has occurred. Currently, Fed funds futures are pricing in a very little change of another hike in May and very high probability of a cut in June, despite the fact the Fed said they wouldn’t cut rates this year.
Futures and bond markets indicate otherwise. Time will tell if it is right and if the banking sector scare will force a premature pivot from the Fed.
This week was heavy with economic data (two key inflation reports) and plenty of banking news to keep up with. Though both inflation reports were not negative, both were overshadowed by investor anxiety related to banking.
However, given all of this uncertainty, markets moved slightly higher this week as we had expected in the last market outlook.
Our outlook last week a slightly bullish, yet volatile overall. With SPX up on the early days of Monday and Tuesday, then down Wednesday and Thursday, with gains made again on Friday, I would say we were spot on.
SPX managed to close above the 100 and 200 day SMAs on Friday, though it does show struggles around the 100 day SMA. If it can remain above the 100 day SMA, the 50 day SMA is a not-so-distant test of strength.
Changes in ETF open interest and equity open interest lean moderately bullish in the near term while SPX open interest changes are slightly bearish. VIX and SPX volume open interest put call ratios have shifted more bearish this week.
CBOE and OCC volume put call ratios have been oscillating. They aren’t clear if they are shifting more bullish or bearish and should be taken as an indication of volatility in the near term.
Vix futures and the IV gap are relatively neutral if not slightly bearish.
Next week we have the Q4 GDP reading on Thursday and the Core PCE (the Fed’s preferred inflation measure) on Friday to anticipate.
All of these things point to no clear directional bias, so the only logical outlook for next week is just continued volatility. I personally think we see some more green, but the chart and indicators are not clear in direction in my opinion.
That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.
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Regards,
Dividend Dollars