In a confused market, overreaction to “good” news — Week of March 6, 2023
|S&P 500 Index||1.96||5.68||-5.73||12.22||10.39||4,045.64|
|Dow Jones Industrial Average||1.85||1.15||0.93||11.07||8.68||33,390.97|
|Russell 2000 Small Cap||2.05||9.69||-3.76||10.42||6.03||1,928.26|
|MSCI Europe, Australasia & Far East||0.89||5.85||0.68||6.68||3.69||2,051.84|
|MSCI Emerging Markets||0.85||2.59||-13.65||1.11||-0.99||980.05|
|Barclays U.S. Aggregate Bond Index||-0.63||-0.47||-10.23||-4.20||0.35||2,039.09|
|Merrill Lynch Intermediate Municipal||-0.06||0.19||-3.40||-1.17||1.72||299.38|
As of market close March 3, 2023. Returns in percent.
— Steve Orr
Two nice days for stocks made for a more restful weekend for some traders. Since the peak of the winter rally on February 2, the S&P 500 and NASDAQ have traded lower 13 of the 21 trading days. Working off excessive sentiment and overbought conditions is part of the normal ebb and flow of the markets. Most of the “good” action over the last two days was ascribed by the media as traders reacting to Richmond Fed Bostic’s remarks last Thursday. In a speech Q&A, he was asked about pausing rate increases. He replied, “I would expect that we could be in position by the middle of summer, late summer...” That was all traders and zero-date option buyers needed. The S&P 500 notched 2%+ gains through Friday’s close.
One “good” comment from a Fed President and the party’s on. Bostic was just giving his opinion and is not a voter on the FOMC this year. Down the hall, we lost count of how many other Fed members, voters and non-voters stated that rates were continuing to go higher — above 5%. Short rates at 5% with consumer credit and auto loan defaults rising are not a good recipe for consumer spending growth. Over the last several months, spending on services by consumers is one of the few positive sectors in the economy.
Current jobless claims and services data are still in expansion mode. Surveys of future conditions, new orders and expectations are uniformly poor or in contraction mode. What’s keeping stocks elevated at or above their moving averages? Sometimes you have to look for what you do not see. Financial conditions is a pretty vague term, but analysts use it as a catchall to describe changes in the amount of money flowing in the banking system, interest rates across countries, exchange rates and other variables.
The Fed, along with the European Central Bank and Bank of England, has been raising short-term rates. That hurts Main Street. At the same time the Fed has been reducing its balance sheet by letting Treasury bonds mature. That pulls money out of the banking system and hurts Wall Street. Ergo, the Fed is pulling on two Financial Conditions levers. At the same time, however, those other central banks are busy pushing more money into the global banking system.
The U.S. Treasury is also in on the Conditions game. Facing another debt drama this summer in Congress, the Treasury is busy sending out payments to vendors and contractors in case the government shuts down. They have about cut their cash balance in half from roughly $490 billion at year-end. So, all the “bad” the Fed is trying to do by pulling money out of the system is counteracted by other central banks and the folks down the (D.C.) street. With ample liquidity in the banking system, stock markets have a cash base to work higher.
We have repeatedly cautioned our readers that we take the Fed at their word. Chairman Powell speaks tomorrow (Tuesday) and then the Fed enters a quiet period. This Friday’s release of February’s job data should show another 200,000 net new jobs and 3.4% unemployment. That should be enough strength to raise odds of a half-percent rate increase. Our indicators continue to point to cash outperforming bonds in the near term. We remain cautious.
Dashboard counsels caution. We are sticking with our underweight in bonds and higher cash position for now.
Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here.
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