Stocks Closed Lower On Friday, But Mostly Higher For The Week
Stocks closed lower on Friday, but mostly higher for the week. The Dow gave up just -0.15% for the week. But the S&P was up 1.43%, while the Nasdaq was up 4.41% for the week.
The bank scare put the market on edge all week. Even though the collapse of Silicon Valley Bank and Signature Bank look to be contained, liquidity concerns remained. Even after 11 of the country's biggest banks injected $30 billion in funding for First Republic.
Moody's downgrading the outlook on the U.S. banking system, and putting 6 specific banks on 'review' (which could potentially result in their rating downgrade), didn't help matters.
The same liquidity concerns were seen in Europe with the beleaguered Credit Suisse bank. They got a $54 billion liquidity lifeline by Switzerland's Central Bank. But that didn't stop their share price from continuing to decline. On Sunday, it was reported that UBS has agreed to buy CS for more than $3B. The deal would allow them to buy it at a per share discount (roughly -59%) to Friday's closing price.
But it's important to note, at least in the U.S., that the big banks are in strong financial shape. And the number of smaller and mid-sized banks flagged for trouble seem relatively few compared to the size and depth of the financial system. The common theme to the current situation seems to be a lack of liquidity for some due to overly large investments into long-dated Treasuries. Arguably, the safest investment on the planet.
Granted, the people running those banks made poor decisions as they did not adequately plan for what they would do if/when interest rates went up, business activity slowed, and depositors needed access to their funds. But that's quite different than the sub-prime mortgage crisis and S&L crisis where banks were saddled with risky assets.
This banking story isn't going away. But it looks like the worst of it is behind us.
What lifted the markets last week was Tuesday and Wednesday's better than expected Consumer Price Index (CPI), and Producer Price Index (PPI), which showed inflation moderating much more than expected. The latest CPI report showed core inflation (ex-food & energy) at 5.5% y/y vs. last month's 5.6%, and last year's peak of 6.5%, while the PPI report showed core inflation at 4.4% vs. last month's 5.4%, and last year's high of 8.2%.
Between the banking scare, and the lower inflation numbers, many are expecting the Fed to lower their terminal rate forecast, while some are expecting them to not even raise rates when they meet on Wednesday, 3/22.
Although, the consensus is that the Fed does still raise rates by another 25 basis points. But there's a growing expectation that the Fed will call it quits sooner rather than later. Either way, it's clear we are nearing the end of the rate hike cycle, and that's bullish for stocks.
In the meantime, you can be sure there'll be plenty of position squaring ahead of Wednesday's FOMC announcement.
Should be a busy couple of days.
See you tomorrow,
Executive Vice President, Zacks Investment Research