Equity markets wrapped up a volatile quarter with a volatile week as each major market index posted strong gains to end the week. The S&P 500 Index led the markets higher last week, notching a +3.48% gain, followed by the NASDAQ with a +3.37% gain, and finally, the Dow Jones Industrial Average returning +3.22% for the week ending March 31, 2023. These gains, coupled with gains thus far in 2023, pushed all three indexes into positive territory for the year’s first quarter (see year-to-date returns below). The weakness in markets spurned by the short-lived regional bank crisis was offset by investor beliefs that the Fed is finally winding down its aggressive interest rate hiking cycle, and the Fed will announce a long-awaited pause or pivot in interest movements at the May 2023 FOMC (Federal Open Markets Committee) Meeting. Interest rate expectations moved the 10-year US Treasury bond lower by 10 basis points, ending the week at 3.47%. Recall, as recently as October 2022, the 10-year US Treasury was trading at 4.24%, fully 77 basis points higher than today, see Chart 1 below.

US Economy

As mentioned above, US Treasury bonds have moved sharply lower in yield since the recent peak in rates in October 2022. Chart 1 below by Valley National Financial Advisors and Y Charts showing the current 10-year US Treasury bond yield and the current Fed Funds Target Rate). The chart shows the dramatic rise in the Fed Funds Rate (the interest rate at which depository institutions trade balances to each other overnight) as the FOMC has moved interest rates higher to combat inflation. While initially moving higher, long-term rates have tapered off and dropped, indicating that the markets are pricing to this current interest rate cycle. The equity markets are efficiently reading this Fed pivot and reacting accordingly – in the current case, by rallying in 2023.

While the markets appear to have moved beyond the recent regional banking crisis, we do not want to ignore other issues showing weakness in 2023 which could again put pressure on banks. Many companies in the U.S. and globally have begun to require a full-time return to work rather than work from home. Office vacancy rates remain elevated compared with pre-pandemic levels; see Chart 2 below from the National Association of Realtors. Like commercial loans, most commercial real estate loans are held by regional banks, and until office vacancy rates recede, pressure will remain on this banking sector. Furthermore, local economies rely on regional bank activities for growth and expansion.

Policy and Politics

Clearly, all is not well in Washington, and a media firestorm is about to unfold with former US President Trump being indicted. Some may argue that a distracted Washington is good for the markets and the economy as lawmakers are too busy making noise to impart new restrictive or harmful laws; lawmakers can stay out of the way and let the economy do its own thing. A returning calm in the markets can be seen from the VIX (The Volatility Index), which measures the implied expected volatility of the US Stock Market. See Chart 3 below from Valley National Financial Advisors and Y Charts showing the VIX. After a recent spike in the VIX due to the failures of Silicon Valley Bank and Signature Bank, the VIX has fallen back to recent pre-bank crisis levels.

What to Watch

• Monday, April 3^rd
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.533/gal.)

• Tuesday, April 4^th
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 10.82M)

• Wednesday, April 5^th
  • ADP Employment Change at 8:15AM (Prior: 242,000)
  • ADP Median Pay YoY (Year Over Year) at 8:15AM (Prior: 7.20%)

• Thursday, April 6^th
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 198,000)
  • 30-Year Mortgage Rate at 12:00PM (Prior: 6.32%)

• Friday, April 7^th
  • U.S. Labor Participation Rate at 8:30AM (Prior: 62.50%)
  • U.S. Nonfarm Payrolls MoM at 8:30AM (Prior: 311.00K)
  • U.S. Unemployment Rate at 8:30AM (Prior: 3.60%)

World famous British Economist John Maynard Keynes said in 1930, “Markets can remain irrational longer than you can remain solvent.” This was a sly way of saying that timing the markets is a fool’s errand. We at VNFA, and others, say that it is “time in the markets rather than timing the markets” that creates true generational wealth. There is always a lot to digest when watching the financial markets. Bulls and Bears exist on both sides of a trade. We remain cautiously optimistic about market returns for 2023 and believe the Fed can moderate inflation without tanking the economy. Opportunities exist for investors, but volatility, while quiet today, could return in short order. Speak with your financial professionals at Valley National Financial Advisors for assistance.

Equity markets this past week seem to be moving on from the tumult caused by some regional banks earlier this month. The Dow Jones increased 1.18%, the S&P up 1.39%, and the NASDAQ 1.66%. Fixed income markets have also continued to rally this past week, with 2-year and 10-year yields moving lower by 16 and 9 basis points, respectively, indicating a continued flight to quality amid concerns over regional banks. Additionally, the Federal Reserve decided unanimously to raise rates by 25 basis points last week, keeping on track with the prior hike in February and slowing from the 50-basis point hike in December. In general, we believe the Fed is in a tough position between balancing actions in response to regional bank failures, targeting price stability, and quelling inflation. Congress will also discuss activity surrounding the banking sector and how to prevent such failures in the future. At the time of this writing, First Citizen Bancshares, Inc., a Raleigh, NC bank holding company, agreed to acquire Silicon Valley Bank, including $56 billion in deposits and $72 billion in loans.

Global Economy

As mentioned, the Federal Reserve raised rates by a quarter-percentage point last week on March 22nd, marking the ninth time in a row that they have hiked. This brings the Fed Funds range between 4.75% and 5.00%. Members of the Fed’s rate-setting committee have made it clear that they believe higher rates will be necessary to quell inflation. Policymakers are anticipating another 25-basis point hike by the end of the year. This hike comes after calls for a pause due to the collapse of both Silicon Valley Bank and Signature Bank earlier this month. However, Treasury Secretary Yellen has implied that these pressures have eased, and large withdrawals have “stabilized.” Chart 1 below of the Federal Funds Rate since 1994 shows that current rates are still a way off from their peak of 6.50% in mid-2000.

The House and Senate committees that oversee banking are holding back-to-back hearings this week to examine regulatory lapses that contributed to the failing of Silicon Valley Bank and Signature Bank. Those testifying at the hearing include Federal Deposit Insurance Corporation Chairman Martin Gruenberg, Federal Reserve Vice Chair for Supervision Michael Barr, and the Treasury Undersecretary for Domestic Finance Nellie Lang. These hearings aim to try to understand what caused the two banks to fail, as well as contain further damage to the economy and reinforce confidence in the banking system. However, there will also be a discussion about whether tighter banking sector regulations are necessary. Keep in mind that, at the time of its failure, 94% of Silicon Valley Bank’s deposits sat above the FDIC’s $250,000 limit, which will likely become a point of scrutiny in these hearings.

What to Watch

• Monday, March 27^th
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.534/gal.)

• Tuesday, March 28^th
  • Case-Shiller Composite 20 Home Price Index YoY at 9:00AM (Prior: 4.66%)
  • Case-Shiller Home Price Index: National at 9:00AM (Prior: 297.08)

• Wednesday, March 29^th
  • U.S. Pending Home Sales MoM at 10:00AM (Prior: 8.13%)
  • U.S. Pending Home Sales YoY at 10:00AM (Prior: -24.10%)

• Thursday, March 30^th
  • U.S. Gross Domestic Purchases Price Index QoQ at 8:30AM (Prior: 3.60%)
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 191,000)
  • U.S. Real GDP (Gross Domestic Product) QoQ at 8:30AM (Prior: 2.70%)
  • US Total Vehicle Sales at 10:30AM (Prior: 16.20M)
  • 30-Year Mortgage Rate at 12:00PM (Prior: 6.42%)

• Friday, March 31^st
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index MoM at 8:30AM (Prior: 0.60%)
  • U.S. Core PCE Price Index YoY at 8:30AM (Prior: 4.71%)
  • U.S. PCE Price Index YoY at 8:30AM (Prior: 5.38%)
  • U.S. Personal Income MoM at 8:30AM (Prior: 0.58%)
  • U.S. Personal Spending MoM at 8:30AM (Prior: 1.76%)
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 63.40)
  • U.S. Crude Oil Production at 3:30PM (Prior: 375.14M bbl.)

The fallout from Silicon Valley Bank and Signature Bank’s failures is under control as the Federal Reserve and Congress act to understand and contain it. The Fed is committed to raising rates as it sees necessary to continue fighting inflation despite banking issues, but we believe that they are nearing the end of their hikes before a pause to digest data. The outcome of the upcoming congressional hearings is top of mind—will Congress reenact some of the changes made to Dodd-Frank in 2018? Despite all of this, we still believe in staying the course when it comes to investing. Trying to time the market means you must be correct at two points: first when you exit the market, and second when you attempt to reenter the market. Please reach out to your financial professional at Valley National Financial Advisors.

Equity markets posted mixed results last week as issues surrounding U.S. Regional Banks continued to roil investors. Further, Swiss banking giant Credit Suisse, beleaguered for decades, finally found a merger partner in fellow Swiss Bank UBS. While seemingly good news on the surface, investors took this news as more of a “canary in a coal mine” signal that further unwelcome news could follow in the banking sector. As a result, there was a large flight to quality trade as investors scooped up U.S. Treasury Bonds. By week’s end, the bellwether 10-year U.S. Treasury Bond had moved lower by 16 basis points to close the week at 3.39%. Just three short weeks ago, the rate on the 10-year U.S. Treasury was 4.06%. Last week, the Dow Jones Industrial Average returned -0.15%, the S&P 500 Index moved higher by +1.43%, and finally, the NASDAQ rallied higher by +4.41%. 

It will take some time for 2022’s interest rate tightening to be completely felt in the economy, but the direction is correct – lower inflation. The Federal Open Market Committee meets this week. Several Wall Street analysts are calling for a pause in further rate hikes, given the recent inflation reports and the continued economic uncertainty surrounding the banking sector. While Fed Fund Futures are still pricing in a +0.25% rate hike this week, we at VNFA certainly believe a pause is more appropriate.

Policy and Politics 

Several factions in the U.S. House and the U.S. Senate call for the Federal Deposit Insurance Corporation to guarantee all deposits at U.S. Depository Institutions (banks, savings and loan associations, and credit unions) rather than only to the current limit of $250,000. A change in the FDIC limit would require an act of Congress, which is possible should a crisis in confidence in the banking sector continue.

 What to Watch 

• Monday, March 20^th  
• U.S. Retail Gas Price at 4:30PM (Prior: $3.568/gal.).

• Tuesday, March 21^st  
• U.S. Existing Home Sales at 10:00AM (Prior: 4.00M).
• U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 10.82M).

• Wednesday, March 22^nd  
• Target Federal Funds Rate Upper Limit at 2:30PM (Prior: 4.75%).

• Thursday, March 23^rd  
• U.S. New Single-Family Houses Sold at 10:00AM (Prior: 670.00K).
• 30-Year Mortgage Rate at 12:00PM (Prior: 6.60%).

Wall Street insiders, executives, regulators, and lawmakers have managed to quell the current banking problem, which thus far has been limited to very few banks specifically catering to the technology and crypto world. Banks remain very well capitalized, especially compared to the 2008-08 Global Financial Crisis, see Chart 2 below from the FDIC & Bloomberg. Contagion is a tricky beast, and the markets need to see just the right amount of government and private intervention before taking a directional turn. We remain cautiously optimistic about the equity and fixed-income markets for 2023. Watch for cues from Chairman Powell this week on whether we get a pivot in policy this year.