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Wall Street went into a tailspin last week due to the bank stock meltdown. U.S. bank stocks suffered the sharpest decline in nearly three years, with the KBW Nasdaq Bank Index tumbling as much as 8.7% on Mar 9, its biggest one-day drop since June 2020. The contagion has spread entirely in the global stock market. The above-mentioned Index lost more than 15% last week.
The crisis hit the market at a time when market participants are worried about the Fed rate hike momentum. The move had been an area of focus as the Fed Chair Jerome Powell made hawkish remarks earlier last week. However, the latest banking crisis has lowered the chances of Fed rate hike this month.
Goldman Sachs no longer sees a case for the Fed to opt for a rate hike at its meeting next week, citing “recent stress” in the financial sector, as quoted on CNBC. The firm had previously expected the Federal Reserve to hike rates by 25 basis points.
Per CME Fed Watch Tool, there is a 89.3% chance of a 25-bp rate hike this month (versus 59.8% chance recorded a day before), 10.7% chance of no rate hike (versus 0% chance recorded a day before) and 0% chance of a 50-bp rate hike (versus 40.2% chance recorded a day before).
Below we highlight a few reasons in detail why Fed is less likely to turn hawkish in the near term and help the stock market to overlook the banking crisis and soar again.
Banking Holocaust in United States
Last week, the 16th largest bank of the United States – Silicon Valley Bank – was shut down. Its shares crashed before the liquidation. The bank had huge exposure to tech start-ups. According to the FDIC, this is the second-largest bank failure in U.S. history.
If this was not enough, earlier this month,Silvergate Capital, a crypto-centric bank, started to plunge from already deeply discounted levels for obvious reason as cryptocurrency is no longer in favor right now. Finally, on Wednesday, the company announced it would be conducting a voluntary liquidation and shutting down its doors.
Rising Rates Weighing Heavily on Some Sectors
Silicon Valley Bank catered to risky zones like start-ups, venture capital, biotech companies and early-stage tech. Over the years, the bank became so associated with the tech startup ecosystem that the fates of both somehow got entwined.
Since rising rates have weighed on these high-growth sectors like technology and small-cap as well as start-up companies heavily, the Fed’s hawkish move has indirectly caused a crash in these risky operating areas. Hence, the U.S. central bank is more likely to stay put, at least for the near term.
Labor Market Easing
The United States economy added 311,000 jobs in February of 2023, beating market expectations of 225,000. The unemployment rate in the United States edged up to 3.6% in February 2023, up from a 50-year low of 3.4% recorded in January and above market expectations of 3.4%. This shows signs of cooling in the U.S. labor market – a factor that the Fed considers thoroughly before taking a rate hike decision.
Below we highlight a few ETFs to play given the possibilities of no Fed rate hike this month.
ETFs in Focus
Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
The underlying Consumer Staples Select Sector Index seeks to provide an effective representation of the consumer staples sector of the S&P 500 Index. The fund charges 10 bps in fees.
The underlying ISE Clean Edge Water Index is a modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry. The fund charges 53 bps in fees.
The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund charges 35 bps in fees.
The underlying NASDAQ-100 Index includes securities of 100 of the largest domestic and international nonfinancial companies listed on Nasdaq. The fund charges 15 bps in fees.
Vanguard S&P Small-Cap 600 Growth Index Fund (VIOG - Free Report)
The underlying S&P Small-Cap 600 Growth Index represents the growth companies of the S&P Small-Cap 600 Index. The fund charges 15 bps in fees.
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3 Reasons Why Markets Could Rally Higher
Wall Street went into a tailspin last week due to the bank stock meltdown. U.S. bank stocks suffered the sharpest decline in nearly three years, with the KBW Nasdaq Bank Index tumbling as much as 8.7% on Mar 9, its biggest one-day drop since June 2020. The contagion has spread entirely in the global stock market. The above-mentioned Index lost more than 15% last week.
The crisis hit the market at a time when market participants are worried about the Fed rate hike momentum. The move had been an area of focus as the Fed Chair Jerome Powell made hawkish remarks earlier last week. However, the latest banking crisis has lowered the chances of Fed rate hike this month.
Goldman Sachs no longer sees a case for the Fed to opt for a rate hike at its meeting next week, citing “recent stress” in the financial sector, as quoted on CNBC. The firm had previously expected the Federal Reserve to hike rates by 25 basis points.
Per CME Fed Watch Tool, there is a 89.3% chance of a 25-bp rate hike this month (versus 59.8% chance recorded a day before), 10.7% chance of no rate hike (versus 0% chance recorded a day before) and 0% chance of a 50-bp rate hike (versus 40.2% chance recorded a day before).
Below we highlight a few reasons in detail why Fed is less likely to turn hawkish in the near term and help the stock market to overlook the banking crisis and soar again.
Banking Holocaust in United States
Last week, the 16th largest bank of the United States – Silicon Valley Bank – was shut down. Its shares crashed before the liquidation. The bank had huge exposure to tech start-ups. According to the FDIC, this is the second-largest bank failure in U.S. history.
If this was not enough, earlier this month,Silvergate Capital, a crypto-centric bank, started to plunge from already deeply discounted levels for obvious reason as cryptocurrency is no longer in favor right now. Finally, on Wednesday, the company announced it would be conducting a voluntary liquidation and shutting down its doors.
Rising Rates Weighing Heavily on Some Sectors
Silicon Valley Bank catered to risky zones like start-ups, venture capital, biotech companies and early-stage tech. Over the years, the bank became so associated with the tech startup ecosystem that the fates of both somehow got entwined.
Since rising rates have weighed on these high-growth sectors like technology and small-cap as well as start-up companies heavily, the Fed’s hawkish move has indirectly caused a crash in these risky operating areas. Hence, the U.S. central bank is more likely to stay put, at least for the near term.
Labor Market Easing
The United States economy added 311,000 jobs in February of 2023, beating market expectations of 225,000. The unemployment rate in the United States edged up to 3.6% in February 2023, up from a 50-year low of 3.4% recorded in January and above market expectations of 3.4%. This shows signs of cooling in the U.S. labor market – a factor that the Fed considers thoroughly before taking a rate hike decision.
Below we highlight a few ETFs to play given the possibilities of no Fed rate hike this month.
ETFs in Focus
Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
The underlying Consumer Staples Select Sector Index seeks to provide an effective representation of the consumer staples sector of the S&P 500 Index. The fund charges 10 bps in fees.
First Trust Water ETF (FIW - Free Report)
The underlying ISE Clean Edge Water Index is a modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry. The fund charges 53 bps in fees.
VanEck Semiconductor ETF (SMH - Free Report)
The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund charges 35 bps in fees.
Invesco NASDAQ 100 ETF (QQQM - Free Report)
The underlying NASDAQ-100 Index includes securities of 100 of the largest domestic and international nonfinancial companies listed on Nasdaq. The fund charges 15 bps in fees.
Vanguard S&P Small-Cap 600 Growth Index Fund (VIOG - Free Report)
The underlying S&P Small-Cap 600 Growth Index represents the growth companies of the S&P Small-Cap 600 Index. The fund charges 15 bps in fees.