S&P 500 Posts Second Consecutive Winning Week
March 24th, 2023
Equity markets maintained their footing this week as regulators and global central banks took assertive measures to prevent last week’s banking failures from spiraling into a broader financial contagion. The Federal Reserve and the world’s five major global central banks spent the weekend hard at work, announcing on Sunday a coordinated effort to improve liquidity. The plan called for modifying the standing U.S. swap contract facilities, changing them from weekly expirations to daily maturities in order to allow foreign central banks to access U.S. currency quickly to fulfill dollar denominated obligations within their jurisdictions. Overseas, Swiss regulators tapped a white knight to rescue Credit Suisse from bankruptcy, which they managed to find in former problem child UBS. The nation’s top banking authority, wanting to salvage Switzerland’s national identity as a banking citadel, rejected initial overtures from US and Saudi investors, and instead coerced UBS to purchase Credit Suisse for a fraction of its previous closing value. It was a rapid news week during which stocks were generally higher. Investor confidence was bolstered in part by steps taken by global banks to backstop their financial sectors but also on hopes that this “banking crisis” will naturally tighten credit conditions, preventing central banks from having to do so themselves. A nod to this position came on Wednesday when the Federal Reserve indicated their rate increases could soon be coming to an end. Economic news was generally light this week with home sales and durable goods being the highlights of the week. Neither moved the needle much against the broader backdrop. Investors for the most part took their cues from the central banks this week, soothed by what they heard and allowing the S&P 500 to add 1.40%.
Fed Takes a Hike
On Wednesday, the Federal Reserve announced its 9th rate hike of its rate tightening cycle, lifting interest rates 25 bps to a range of 4.75% to 5.00%. In hiking, Fed Chairman Jerome Powell sent a strong signal to the market—price stability remains a top priority for the central bank so long as inflation and hiring remains strong. The Fed also penciled in one more 25 bps hike this year which will take the benchmark range to a peak of 5.00% to 5.25%, unchanged from its December 2022 forecast. The central bank’s dot plot, which shows projections for the federal funds rate, revealed the Fed now expects to lower rates next year. The bank expects the benchmark rate to fall to around 4.30% in 2024 but that is higher than their 4.10% projection in December. For 2025, the Fed estimates rates will fall to 3.10%. Despite the tough talk on inflation, Powell did seek to reassure investors of the US financial system’s stability, reaffirming the banking system is sound and resilient with strong capital and liquidity. He reiterated the Fed would continue to use all the tools needed to ensure liquidity continues to flow through the banking system. Despite volatility in equity markets, bank deposits outflows have managed to stabilize in the past week, suggesting regulators’ swift actions have helped to soothe depositor concerns.
Higher Rates and Lending Standards to Slam Brakes on Spending
Prior to the crisis erupting in the banking industry, the housing market was showing signs of an early spring rebound. Existing home sales spiked 14.50% in February as the median price dropped for the first time in over a decade and mortgage rates retreated from recent highs. February also marked the first monthly sales volume increase in 12 months as sales rose to an annualized rate of 4.58 million units. New home sales were also higher in February, rising 1.10%. That was their third consecutive monthly increase. The new home sales market has held up relatively well compared to the existing home sales market over the last several months as homebuilders have been more willing to cut prices or offer incentives than homeowners. That said, the data is backwards looking and was tallied before the crisis in the banking industry erupted two weeks ago. Even prior to this, evidence had been emerging that demand was softening for interest sensitive purchases. Durable goods orders, products meant to last three years and that are often financed, fell -1.00% in February. With bank managers now closely scrutinizing loan portfolios and balance sheets, lending standards are likely to tighten for both households and businesses which may further curb demand.
Final Thoughts
This week two thoughts came to mind. The first was being reminded just how often so-called crises beget more crises. While the Silicon Valley Bank (SVB) collapse was non-systematic and quickly contained, it kicked off a psychosis and paranoia that now has investors stomping on every bank’s floorboards checking for rot. With enough stomping, even banks with healthy balance sheets can break once investors and customers abandon them. When several banks collapse in succession words like contagion get thrown around, but this “contagion” is not a function of the interconnectivity and counterparty risk the way it was in 2008. This contagion, so far, is simply investors and customers fleeing any bank that could come under scrutiny. Peripheral banks like SVB and Signature had their own unique set of issues. Credit Suisse suffered from years of mismanagement and internal problems that had nearly capsized the firm multiple times in recent years, but in targeting Deutsche Bank (DB), investors appear to be fleeing the company based on its past sins more so than its current standing. DB is no angel, having laundered money for Russia, having conducted business with unsavory individuals, having been embroiled in costly litigation, and regulatory run-ins, but it is profitable and by most analyst accounts heads and shoulders above Credit Suisse. Should DB ultimately succumb to social media and a run on the bank, it would throw this “crisis” into a new gear, but its fundamentals look in-line with other major European banks after years of working to be more conservative. This led to our second thought of the week. Two weeks of consecutive gains suggest that Wall Street sees a silver lining in this “crisis” – tighter credit conditions without the Fed having to raise rates. The market is apparently comfortable with getting to the same point, just as long as the Fed didn’t do it themselves. That is seemingly what drove investors’ attitudes this week, which was reinforced by Powell’s own comments on the likely impact of the recent bank failures on credit conditions. This all begs the question, however, whether the market or the Fed is correct in this assumption. Up until two weeks ago when this banking situation began to unfold, the Fed was poised to raise rates by as much as 50 bps based on the strengthening inflation data and the continued strength in the job market. If you are an average guy on the street, whose bank account has not been impacted (nor will anyone’s bank account be impacted according to Yellen), then are you even aware of this so-called bank crisis? Save for some splashy headlines early on, is the average American changing their behavior this week versus two weeks ago as long as they have a job and their ATM card still works? The point is that the Fed was almost obligated to say accommodating things following the FOMC meeting to help tamp down the psychosis and comfort investors. Markets loved nothing more than to hear what they’ve been wanting to hear since the beginning of the year (i.e. rate pivot on the horizon). At the end of the day, however, it comes down to the data and the so-called crisis probably does not materially change the consumerism driving inflation.
The Week Ahead
Markets will seek to close the first quarter on a high note. On the economic front, we’ll have the latest on personal income and spending as well as consumer sentiment.
What is a Kangaroo Word
You may never look at words the same way again. A kangaroo word is a word that contains the letters of another word that appear in order inside of it and that have the same or similar meaning. The phrase kangaroo word is derived from the fact that kangaroos carry their young – known as joeys – in a body pouch, and similarly, kangaroo words carry their “joey words” within themselves. Here are some examples of kangaroo words and their joeys.
The word rambunctious means uncontrollably exuberant and boisterous, and within that word, there are seven letters that appear in order to form the word raucous (RAmbUnCtiOUS) meaning a disturbance or commotion. Within the word chocolate, one can find the letters to spell cocoa, which is the powder made from the seeds of cacao used to make chocolate. Letters in the word masculine form the word male. When a plant flowers, it blossoms, and the letters within blossom spell the word bloom. A blossom can also refer to the flower of a plant. Inside the word chicken, one can find the word hen. Within the kangaroo word honorable, five letters spell the word noble. The word capsule includes the joey word case. The kangaroo word deceased includes the word dead. The word isolate, which means to set or place apart, detach, or to separate so as to be alone, includes the letters to form the joey word sole.
The word perambulate means to walk through, about, or over, or to travel through or traverse, and its joey word is amble, meaning to stroll or saunter. A respite is “a delay or cessation for a time, especially of anything distressing or trying; an interval of relief.” It may be called a rest, which is a joey word that appears within respite.
Below are some additional kangaroo words:
Disappointed – sad
Burst – bust
Cavern – cave
Admonish – monish
Contaminate – taint
Allocate – allot
Deception – con
Destruction – ruin
Depository – depot
Precipitation – rain
Artistry – art
Instructor – tutor
Evacuate – vacate
Astound – stun
Banish – ban
Municipality – city
Barren – bare
Revolution – revolt
Plagiarist – liar
Devilish – evil
Prosecute – sue
Supervisor – superior
Observed – see
Anti-Kangaroo words contain a joey word that is their antonym. One example is the kangaroo word wonderful and its anti-kangaroo word woeful that appears within. Another example is there and here. Prudent, which means acting with or showing care, includes its antonym rude. Below is a list of additional anti-kangaroo words:
Threat – treat
Friend – fiend
Pest – pet
Feast – fast
She – he
Resigned – reigned
Female – male
Fabrication – Fact
Courteous – curt
Convent – coven
Animosity – amity
Bearded – bare
Communicative – mute
A twin kangaroo word is a kangaroo word that contains two joey words. One example is community which includes the joey words county and city. The twin kangaroo word container includes both can and tin. Below are a few additional twin kangaroo words and their joeys:
Diminutive – minute – mini
Feasted – fed – ate
Deteriorate – die – rot
A grand kangaroo has a kangaroo word within it that also has another joey word that is in the pouch of the kangaroo word. One example of a grand kangaroo word is frangible which means fragile or brittle, and it contains the kangaroo word fragile, and fragile contains the joey word frail. The word expurgate is a grand kangaroo word meaning “remove matter thought to be objectionable or unsuitable from a text or account,” and its kangaroo word is purge, and within purge is the joey word pure. The word complaisant, meaning “willing to please” has the kangaroo word compliant (inclined to agree with others or obey rules, acquiescent) and the joey word pliant which means pliable. Additional Grand Kangaroo words and their kangaroos and joeys are alone – lone – one and also amicability – amiability – amity.
Our last fun fact to share is that kangaroo words are part of something called “recreational linguistics” which refers to using games such as word puzzles, word searches, riddles, and other activities to stimulate language learning.