03.04.2023 What Banking Crisis? US Stocks Gain 7.5% in the First Quarter of 2023

Only three weeks ago, investors trembled on the news that Silicon Valley Bank and Signature Bank had failed, while Credit Suisse, founded in 1856, was sold for pennies on the dollar to UBS.

Three weeks later, does anyone even remember? The S&P 500 is up 7.5% YTD. At noon on March 12th, we wrote Silicon Valley Bank is not Lehman Brothers, commenting specifically that no bank depositors had lost their savings in 70 years:

In principal, any bank deposit over $250K is not covered by FDIC insurance. In practice, when the FDIC take over a bank, the assets of the bank (deposits) are merged into a healthier bank. Depositors may not have access to their money for a week or two, but then financing operations resume as normal when the new bank takes over.

At 6 PM on the 12th, the Fed and FDIC announced that depositors would have access to the funds the next day. We took a number of phone calls from concerned clients in the last three weeks, many of whom took our advice to ADD funds to their investment accounts – so far, so good!

Even better news for investors:

• US inflation fell to 6% in March, still well over the 2% target, but the best report since inflation peaked at 9.1% June 2021
• The Federal Reserve Board raised interest rates another 0.25% in March, indicated one more raise to come in May.  This indication is in line with our expectation that the Fed would be done tightening by June 2023
• US Jobs situation remains the best in decades
• US stocks are STILL undervalued by 10% according to the Morningstar valuation model

Oil cut

Stock investors are on edge as a surprise oil production cut by OPEC+ members threatens to refuel inflation. The unexpected move by Saudi Arabia and other members will lead to a decline in output of almost -1.2 million barrels of crude per day starting next month, rising to an estimated -1.6 barrels per day reduction by July after Russia implements a planned cut of -500,000 million barrels per day.

Energy experts are divided over the potential impact of the cuts. Some expect oil could rise as much as +$10 per barrel or more and push gasoline prices back toward the $4.00 level. Gasoline prices at this time last year were hovering around $4.20 per gallon compared to the $3.50 per gallon reported by AAA as of Sunday.

Some experts question whether the new cuts will have a significant impact, however, pointing to the fact that OPEC+ members have been running short of production targets by about -2 million barrels per day. Meaning the production cuts are not as deep as the actual production shortfalls. Some expect those shortfalls could grow, too, as Russia struggles to service its oil infrastructure and various issues in other OPEC countries that have slowed output.

OPEC’s lower output may also be offset by production increases in non-OPEC countries, including the US, Brazil, Canada, and Norway. For investors, the threat of higher oil and gasoline prices means that inflation may stay elevated for longer, in turn forcing the US Federal Reserve and other global central banks to hike rates higher and hold them there longer than anticipated.

Fed

At the same time, investors are heavily debating the possibility that the US might slip into recession later this year as the combination of high inflation and rising interest rates strangles growth.

When we ended last week, the trade was thinking it was basically a coin-toss if the Fed would hike rates by another 25-basis points at it’s next FOMC meeting in May, after which the Fed would pause and then start cutting rates into year end. With the latest move by OPEC and Russia to further tighten oil supply, it will be interesting to see if the trade still believes rates will be lower at the end of this year than they are right now, especially if inflation reignites from crude oil pushing higher.

Let’s also keep in mind, the move by Saudi Arabia is somewhat a slap in the face to US leaders who have been urging OPEC to help fight inflation and to keep its spigots fully open. A couple of other events this week have the potential to reignite Wall Street’s “risk-off” mentality.

More events

Former President Donald Trump is expected to be arrested in New York which some fear could create even greater political divide in Washington just as lawmakers are wrangling over raising the debt ceiling. Failure to do so could result in a debt default later this summer. Internationally, House Speaker Kevin McCarthy will meet with Taiwan’s president, Tsai Ing-wen, in California on Wednesday. This risks further raising tensions between the US and China at a time when most experts say they are already historically high.

China claims self-governed Taiwan is part of its territory and considers recognition of the island as an independent nation a “red line.” The US and China are already battling it out over technology access and alleged spying, while also being deeply divided over Russia.

Data to watch

Today, investors will be digesting the ISM Manufacturing Index which since December has been below 50, the threshold separating expansion from contraction.

More importantly, investors are anxious to see the “prices” component after the gauge made a big jump in February to 51.3 from 44.5 previously, the first increase in four months. The ISM Services Index is out on Wednesday with investors equally anxious to see how prices are trending amid ballooning wage growth in the sector. The top highlight this week will be the March Employment Report on Friday.

Will Commercial Real Estate Fallout Cause more Banking Worries? Data floating around inside the trade estimates that $270 billion in commercial real estate loans are up for renewal this year, of which about 70% of that debt is held by small regional banks.

What Banking Crisis? US Stocks Gain 7.5% in the First Quarter of 2023

Wishing you a great week!