· Stocks moved cautiously higher this past week as investors await the bulk of earnings season to begin tomorrow. That said, relatively benign inflation data along with better than expected earnings from JP Morgan this past Friday has given the financial markets reason for hope that the Fed’s quick action, post- the collapse of SIVB may have contained the crisis in the banking sector. Nonetheless, as long-term investors, as always, we feel confident that over time patient investors will again be rewarded while those that make wholesale changes to their portfolio as a result of the prevailing economic or political winds will be compromised.
However, it stands to reason that several questions need to be answered prior to the S&P 500 moving substantially higher. They include 1) is the Federal Reserve at or near the end of its tightening cycle; 2) how much of an impact will the year-long battle the Fed has waged against inflation have on the economy and corporate earnings and 3) is some or all of this impact already priced in should interest rates stabilize?
Investors will most likely have the answer to the first two of these questions within the next two quarters and, in regard to the third question we believe that investors have priced most of the impact into current stock prices. However, at this time we think a substantial move from these levels will take time.
· On balance, bank earnings impress. Despite the concern as a result of the collapse of Silicon Valley Bank (SIVB) and the ensuing outflows from other regional banks, several money center banks including the likes of JP Morgan (JPM), Citigroup (C) and Wells Fargo (WFC) reported earnings this past Friday that were, on balance, viewed favorably by Wall Street. Shares of JPM and C rose by 7.55% and 4.78% while WFC fell $0.02 or 0.05%. Riding the coattails of JPM was Bank of America (BAC) which rose 3.36%. Despite this, JPM CEO Jamie Dimon sounded notes of caution stating that the volatility in the banking sector “is not yet over” and that there will be “repercussions for years to come” within his annual letter to shareholders. This may be a bit self-serving as flows of capital may be more likely to flow to banks deemed too big to fail, of which JPM is one, as are BAC, C and WFC.
· If voting member Christopher Waller has his way, investors may be in for another 0.25% rate hike when the Federal Reserve its two day regularly scheduled meeting May 3. Speaking at the Graybar National Training Conference, referring to inflation, Waller stated that “whether you measure inflation using the CPI or the Fed’s preferred measure of personal consumption expenditures, it is still much too high and so my job is not done.”
· Oil prices rise as a result of volume cuts announced by OPEC+ along with closer ties between OPEC and Russia. Reflecting the rise in the price of oil, prices at the pump have risen nearly $0.10 this past week as driving season heats up.
· According to data from FreddieMac, mortgage rates decreased for the fifth consecutive week. “Incoming data suggests inflation remains well above the desired level but shows signs of deceleration. These trends, coupled with tight labor markets, are creating increased optimism among prospective homebuyers as the housing market hits its peak in the spring and summer.”
· This coming week, the void from the lack of any eye-popping economic releases will most likely be filled by earnings. It will pay to keep an eye out for those listed below, as well as others. Regardless of the results, expect cautious comments.
· King Dollar is not dead! Despite the potential and perhaps even the reality of the BRIC Countries (Brazil, Russia, India and China) establishing an alternative to the U.S. Dollar, it is hard to believe that democratically elected countries that comprise two-thirds of global GDP would place their trust and confidence in the BRICs, especially China. That said, the dollar index which sits within approximately ten percent of a decade high set during September, 2022 has weakened recently and could come under continued, normal pressure as interest rates abroad have risen, attracting flows out of the dollar.
· Interest rates have dropped. The yield on the two-year U.S. Treasury Note has fallen from a pre-Silicon Valley Bank (SIVB) peak of 5.05% on March 8 to its current level of 3.97%, a decline of more than twenty percent on the belief that the collapse of SIVB will lead to tightening lending standards, thereby slowing economic growth. We are already seeing signs of this in bank lending data outlined below.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, March Housing Starts; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and March Existing Home Sales and then finally, on Friday, the Index of Leading Economic Indicators (LEI).
· The earnings season threw investors a softball this past week as money center banks, the strongest of the financials, kicked off the second quarter with earnings that were received favorably. However, this week some challenges lie ahead on the earnings calendar. Some noteworthy companies that will provide a look into the health of the economy include M&T Bank (MTB), Charles Schwab (SCHW), JB Hunt Transport (JBHT), Bank of America (BAC), Netflix (NFLX), Lockheed Martin (LMT), Goldman Sachs (GS), Intuitive Surgical (ISRG), IBM (IBM), Elevance Health (ELV), Morgan Stanley (MS), Abbott Labs (ABT), Tesla (TSLA), Taiwan Semiconductor (TSM), Philip Morris (PM), AT&T (T), Union Pacific (UNP), American Express (AXP) and Procter & Gamble (PG).
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