Mar 17, 2023
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“Being Irish, he had an abiding sense of tragedy, which sustained him through temporary periods of joy.” —William Butler Yeats
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President Eisenhower once said that everyone is Irish on St. Patrick’s Day, and most investors probably consider themselves Irish today. Even on a good day like yesterday, they can’t shake the feeling that there’s still more pain to come, especially heading into another weekend. Maybe that just comes with the territory after a year-long bear market, a war in Europe, and the most aggressive Fed tightening cycle since the early eighties. But a banking crisis is only the newest entry on to the growing list of worries.
Futures are in the red this morning and have been drifting lower all morning ahead of a busy day for economic data. European stocks opened higher, and traded up over 1%, but are now in the red. At 9:15, we’ll get updates on Industrial Production and Capacity Utilization for February, and then at 10 AM, we’ll close out the week with Leading Indicators and Michigan Confidence. Leading indicators have been in recessionary territory for months now, and in the Michigan report, the key area of focus will be inflation expectations following the NY Fed’s update earlier this week which showed a significant decline in one- and three-year inflation expectations.
Given it’s St Patrick’s Day, it’s an appropriate time to highlight the stocks deepest in the green this year that investors would be the luckiest to have in their portfolios. The table below lists the 20 stocks in the S&P 500 that are up the most YTD. Topping the list, NVIDIA (NVDA) and Meta (META) have already rallied 70% in the first two and a half months of the year. After these two stocks, eight others are up over 40%, and all 20 are up over 25% on the year. Looking at where each of these stocks is trading relative to their trading ranges, most are at overbought levels, but there are a handful like Tesla (TSLA), Warner Bros (WBD), Royal Caribbean (RCL), and Wynn Resorts (WYNN) that are trading relatively close to or even below their 50-day moving averages.
Usually, when you look at a list of best (or worst) performing stocks in an index, smaller names dominate the list as they are the most prone to large swings in either direction. What stands out about this list is the fact that some of the best performers are also among the largest stocks in the index. The two top performers – NVDA and META – both have market caps of more than $500 billion, and when you take Tesla (TSLA) into account, three of the top four have market caps of greater than $500 billion. Lastly, of the top ten performers, half of them have market caps of over $100 billion. In other words, these are some big leprechauns!
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Mar 16, 2023
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“The Federal Reserve, in close consultation with the Treasury, is working to promote liquid, well-functioning financial markets, which are essential for economic growth.” – Ben Bernanke 3/16/2008
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The quote above could have easily been made this week, but it was actually fifteen years ago today when Bear Stearns, the fifth largest US investment bank, avoided bankruptcy in what was an arranged sale to JP Morgan for $2. While a number of other smaller players in the subprime housing business had already folded, Bear was the first of the major dominoes to go. The emergency takeover of Bear staunched the wound for a time, but it was only a matter of weeks before the cockroaches on bank balance sheets came out from the walls. We all know what happened from there. 15 years to the day later, the question every investor is trying to answer is whether SVB Bank is this generation’s Bear Stearns or just a headline that most will forget all about a year from now.
Futures are mixed this morning as the S&P 500 and Dow are indicated modestly lower while the Nasdaq is in positive territory. European stocks are bouncing ahead of the ECB decision at 9:15 Eastern and on the news that Credit Suisse has taken a $54 billion loan from the Swiss National Bank to improve its liquidity position. US equities aren’t seeing the same lift since they rallied after Europe’s close yesterday on rumors of the SNB loan that European stocks are rallying on now.
The economic calendar is busy this morning as Jobless Claims, Import Prices, Housing Starts, Building Permits, and the Philly Fed all just hit the tape. Jobless Claims on both an initial and continuing basis were lower than expected, Import Prices dropped less than expected, and Building Permits and Housing Starts both came in significantly better than expected. The only report that missed forecasts was the Philly Fed manufacturing which came in at -23.2. Surprisingly, there has been little reaction (so far) in equity futures or the treasury market as attention will now shift to the ECB decision.
What started as a bank run on a regional bank in California last week quickly spread to regional and money center banks around the country and then this week across the Atlantic to European banks. But the weakness in equities hasn’t been confined to just the Financials sector. In the US, the Financials sector is down just over 10% over the last five trading days, but other cyclical sectors have also been pounded as Energy is down 9%, Materials is down 7.5%, and the Industrials sector is down over 5%. Around the world too, equities are down over the last week.
The snapshot below from our Trend Analyzer shows the performance of international regional ETFs. Over the last week, every single one of them is down with declines ranging from a loss of 1.42% for the Global 100 ETF (IOO) to a loss of 7.6% for the Latin America 40 ETF (ILF). Over the last three years, we’ve become all too familiar with the process of disease and virus transmission, and what we’ve seen over the last week is the very definition of contagion. Whether or not it’s just a cold or something worse like the flu will become more apparent in the coming weeks.
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Mar 15, 2023
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“Beware the Ides of March.” – Shakespeare, Julius Caesar
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Futures are down sharply this morning, but surprisingly it has nothing directly to do with issues facing a US regional bank. Today’s weakness is due to a 30% plunge in Credit Suisse as its largest shareholder said it will no longer put additional capital into the bank. Dow futures are down over 600, the S&P 500 is indicated to open down 1.7% and the Nasdaq is holding up better with a drop of 1.4%. It’s been a busy morning for economic data as PPI missed expectations, Empire Manufacturing plunged, and Retail Sales were in line with forecasts. European stocks are down well over 2%, and Treasury yields are plunging. The only risk asset rallying on the day, at this point, is bitcoin.
As we type this, the two-year yield is down over 20 basis points (bps) and below 4% again in what can only be characterized as a turbulent move. If you were on an airplane, you’d be asking for another one of those white bags that they keep in the seat pocket in front of you. Today’s move is on pace to be the fifth straight day that the yield has moved more than 20 bps (up or down) in a single day. To put that move in perspective, the only other time that the two-year yield has had as many 20 bps moves in succession over the last 45 years was in December 1980. Outside of the early 1980s, there has never been another time when the yield on the two-year even moved 20 bps for three consecutive days. Two-year Treasuries have always been one of the most stable assets across the financial spectrum, but they’ve failed on that front lately.
The current moves in the two-year treasury stand out even more when you consider the actual level of yields. Sure, the last year or so has seen yields rise to the highest level since 2007, but in the early 1980s, which was the last time there was as much volatility in two-year yields as there is now, yields were more than double where they are now. Double. The Fed has gotten a lot wrong in their forecasts over the last few years, but one point where Powell was spot on was last August when he said that fighting inflation will “bring some pain”. He should have just come out and said, “Beware the Ides of March.”
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Mar 14, 2023
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“History is largely a history of inflation, usually inflations engineered by governments for the gain of governments.” – Friedrich August von Hayek
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Futures have been rallying this morning as bond yields move higher as investors breathe a sigh of relief due to the fact that there were no additional bank blowups overnight. Regional banks are seeing the most strength as a stock like First Republic (FRC) is up over 60% in the pre-market. That’s great if you bought the stock yesterday, but it’s still down sharply from where it closed last Friday, let alone where it was coming into the year.
The big number of the morning is obviously the February CPI and that reading came in right in line with forecasts at the headline level (0.4%). Ex Food and Energy, the reading was 0.5% which was slightly higher than expected (0.4%). On a y/y basis, both headline (6.0%) and core (5.5%) were right in line with forecasts. Markets were worried about another hot reading, so the immediate reaction has been a modest bounce in equity futures.
While the moves have been the most pronounced in the Treasury market and regional banks stocks, volatility and extreme reversals have been showing up all over global financial markets in the last several days. Take the equity market of Japan. Last week, the TOPIX finally broke above multi-month resistance to new 52-week highs on Thursday. From a technical standpoint, the action looked like a textbook breakout with well-defined support at former resistance near the 2,000 level. That was Thursday.
In the three days that followed, the TOPX has been down at least 1.5% every day for a total decline of 6%. And that support around the 2,000 level? It was more like Swiss cheese. In last night’s trading, the TOPIX also sliced right through its 50-day moving average (DMA) although it did find some support at the 200-DMA.
Going all the way back to the mid-1980s, the last four trading days for the TOPIX represent just the second time that the index hit a 52-week high and then followed that up with three straight declines of at least 1%. The other period was in October 2003 when the TOPIX hit a 52-week high on 10/20 and then followed that high up with daily declines of 1.1%, 1.8%, and 5.3%, respectively for a total decline of 8.8%. During that correction, the TOPIX’s total decline from that 52-week high pullback was 14.5% before the index went on to recover and resume its upward trend.
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Mar 13, 2023
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“The fundamentals of America’s economy are strong.” – John McCain 4/17/08
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Phrases like the seven words above never seem to be made when markets and the economy are running smoothly, and we’ve heard a number of similar phrases like this made by officials over the weekend and this morning. That’s definitely not to say that the events of the last week and today are a repeat of 2008, but these types of comments almost never have their intended purpose of providing comfort to investors.
What’s happened over the weekend has been notable and will have both intended and unintended ramifications down the line. With deposits at US banks having essentially been backstopped by the actions of the Federal Government, one could argue that the banking system has been de facto nationalized, and the consequences of that are completely unknown, so we won’t even begin to speculate.
The flight to safety has been incredibly pronounced in the Treasury market as the 2-year yield is down nearly 50 basis points (bps) this morning after falling 29 bps on Friday and 20 bps Thursday. What’s truly remarkable about these declines is that they came just after the 2-year yield topped 5% for the first time since June 2007. Going all the way back to 1977, the last time the 2-year yield dropped more than this in a three-day span was just after the 1987 crash, and then before that, it happened in multiple periods from late 1979 through early 1983.
Finally, despite little direct connection between what’s going on with SVB and other US regional banks, European bank stocks have also seen sharp declines in the last two days as the STOXX 600 Bank Index is down over 9%. Analysts are out defending the banks as having ‘limited risk’. That may be true with regards to SVB and other regional US banks specifically, but European banks aren’t immune to the overall trend impacting US banks (a rapid surge in interest rates shortly after central bank officials were assuring markets that any increase in rates would be gradual).
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Mar 10, 2023
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“I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson
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Futures are lower this morning heading into the 8:30 Non-Farm Payrolls report but given the action in SVB Financial (SIVB) which is trading down over 60% for the second straight day, the biggest surprise may be that futures aren’t even lower.
The February Non-Farm Payrolls report was just released and while it was mixed relative to expectations, it was generally positive for markets. Economists were expecting the headline reading to come in at 225K this morning, but the actual reading came in at 311K. Below the surface, though, the Unemployment rate was higher than expected, average hourly earnings were lower than expected, and average weekly hours were also lower than expected.
Yesterday was one of the worst days for bank stocks in years. In the 17 years that the S&P Regional Banking ETF (KRE) has been trading, Thursday’s 8.11% plunge was only the 22nd single-day decline of 7.5% or more, and it was the first since the COVID shock in early 2020. Before that, you have to go back to the debt limit and US credit rating downgrade of August 2011 to find the next occurrence when there was one day (8/8/11) when the ETF fell just under 10%. During the Financial Crisis, moves like yesterday’s almost seemed common. Whether yesterday was a one-day shock in the bank stocks or not remains to be seen, but based on the history of prior occurrences, like cockroaches, more often than not, when there’s one single-day large decline, others are usually lurking.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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