It’s been a little while since I’ve done a general market update, and given the abundance of action we’ve been seeing recently, particularly in financial sector (it’s been a tough couple weeks to be a regional US bank eh?), I thought now was the perfect time.
If you’d have asked me about First Republic, Silicon Valley, or Signature Banks a few weeks ago I wouldn’t have been able to tell you a thing. However, these particular financial institutions have suddenly become household names—and for all the wrong reasons. There seems to be a common feeling of uneasiness among investors at the moment—the recent bank failures are leaving some with a feeling of déjà vu…remember what happened back in ’08?
This is shaping up to be yet another turbulent week for markets as the Federal Reserve is set to meet to make its next decision on interest rates. As we anxiously await for the central bank policy decision on Wednesday, investors will be watching closely for any additional signs of stress in the global banking industry as well as new relief measures from regulators. Will the $30 billion in deposits in First Republic from some of the biggest banks in the US (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and several others), and UBS’s rescue purchase of Credit Suisse be enough to stabilize the financial sector? Only time will tell…
Back to interest rates, though. Prior to the Silicon Valley Bank fiasco, Jerome Powell’s hawkish tone on the sticky inflation seemed to indicate that a 50 basis point rate hike was probable, but this recent bank turmoil has all but taken a half-point hike off the table as the Fed is prioritizing financial stability. Futures trading is currently implying that a quarter-point hike is the most likely scenario, at which point the Fed very well might pause hikes to assess the economic impact of their tightening cycle.
In fact, bond traders are betting that the Fed will began cutting rates later this year—they’re pricing in a 100 basis point cut in interest rates between the estimated peak in May to the end of the year. According to Priya Misra, Global Head of Rates Strategy at TD Securities, the market “is pricing in a Fed that might be forced to hike into a recession and thus will have to quickly turn around and cut.”
Now you may be thinking since increases in interest rates in 2022 quickly sent stocks down, the reverse must also be true. The market should rebound promptly after the first rate cut, right? Wrong…history tells us that this is simply not the case (far from it actually). Exhibit A shows us data compiled from the last six recessions, and we can see that on average the market is still 14 months away from bottoming-out after the initial cut (and an expected decline of 31% in that time).
So how should this affect our current market outlook? Unfortunately we’re lacking a crystal ball to inform us when the market will hit the bottom (and of course it’s even possible that it already did in 2022…although I must say I have my doubts), so it’s best to consistently add to your positions and dollar cost average, but if you can afford to I’d advise setting aside some additional funds to invest. History clearly tells us that when the Fed starts cutting rates, there are plenty of buying opportunities out there for investors. Between the macro trends and more recently the financial sector woes, I can’t help but feel that the market is far from being out of the woods. I foresee continued volatility ahead.