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The market starts this week facing as much uncertainty as at any time since the pandemic...

March 21, 2023

The market starts this week facing as much uncertainty as at any time since the pandemic, and there will be a lot of fluidity in the headlines, so I want to make sure we have a broad road map for each event that tells us what makes the issue better or worse, so we can view head- lines in the proper context. 

Issue 1: Regional bank stability. First Republic (FRC) was stabilized late last week with the capital deposits by the major banks, and there’s no risk of a bank run that erases depositors’ money. That said, it’s unlikely FRC will be able to remain independent so the sooner FRC is absorbed into a major bank, the better. Meanwhile, FDIC auctions for SVB and SBNY are ongoing, and again the sooner there’s clarity, the better. Going through the week with FRC basically a zombie bank and no clarity on the future of SVB or SBNY won’t be good for markets. 

Issue 2: Deposit Insurance. Over the weekend, numerous regional banks asked the government to guarantee all deposits at banks for two years while pressure is growing on the FDIC to increase the insurance limit from 250k permanently. The market wants more deposit insurance so the sooner either (or both) of these become reality, the better. Conversely, if we get to the end of the week with no changes to deposit insurance, that’ll be a negative as uncertainty around deposits will remain. 

Issue 3: The Fed Decision. The bottom line is the market wants the Fed to signal the rate hike process is over (whether they hike 25 bps or not). If the Fed leaves the door open to more hikes (which is entirely possible) then that will be a negative for stocks amidst all this volatility. 

Issue 4: Domestic and Geopolitics. Chinese Premier Xi Is visiting Russia today, and the major concern is that China supplies arms to Russia. If that occurs, it’ll be an incremental negative. If it does not and Xi removes that possibility, it’ll be a small positive. Domestically, President Trump may be arrested on Tuesday in connection with hush money payments from the past. While not a major market influence, if there are protests in the wake of his arrest, that would just add to the general upheaval (it won’t directly cause a pullback in stocks, but it won’t help). 

Bottom line, there are a lot of moving pieces in this market, and given that, the fact that the S&P 500 is still positive YTD is impressive and must be respected. However, with so many potential “landmines” lurking, we continue to think that conservative positioning (defensive sectors such as dividend stocks and value stocks, value over growth, small stocks verses large cap) remains the way to best weather this near-term volatility while maintaining long-term exposure. 

Economic data reflected still-sticky inflation, mixed economic growth, but a still-resilient consumer and tight labor market. And if it weren’t for the banking stresses, the debate between a 25 bps or 50 bps rate hike would still be very much alive. But the bank crisis did happen, so these reports will keep the debate alive for 25 bps vs. no hike, and based on the facts, it implies that 25 bps is still entirely appropriate, simply because inflation isn’t falling quickly. 

Bottom line, this week really is all about the Fed, because the market expects a dovish pivot. If that happens it can cause a rebound. But if the market is wrong again in aggressively pricing in a dovish Fed shift, then we need to brace for a lot more volatility. 

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