Addressing fears about the Fed's rate policies, slowing economic momentum, and bank bailouts.
The bill has seemingly come due for the Federal Reserve’s mistaken belief inflation was “transitory.” A late start in tightening policy to combat inflation led to the fastest rate hikes in forty years, and it should come as no huge surprise the stress from such a move might break something. The collapse of Silicon Valley Bank (“SVB”), the 16th largest bank in the U.S., was the headline casualty, but Signature Bank was also shut down by regulators and the impact was evident across the sector.
Given the potential for widespread market disruption, regulators stepped in with a package of emergency measures to calm fears among depositors and help prevent contagion. The government announced the FDIC would guarantee all deposits held at SVB and Signature Bank, even those beyond the $250,000 limit, by invoking a “systemic risk exception.”
The Federal Reserve also put in place a lending facility, the Bank Term Funding Program, available to banks to ensure customer withdrawals could be met. There remains some concern the actions taken may not be enough, but further intervention seems likely if the need arises.
The banking turmoil has substantially changed expectations for the Federal Reserve’s path forward. Fed policy works with long and variable lags. The SVB situation demonstrates the impact of rapid rate increases is starting to bite. Rates have been volatile, but as of the time of writing, the 10-year Treasury has fallen from a peak of more than 4% in early March to approximately 3.4%. The two-year Treasury, following the failure of SVB experienced its biggest single-day rally since 1987, with yields falling below 4% from over 5%.
Currently, signs of a meaningful slowdown are hard to find as the economy continues to show momentum, though a slowing of the economy over the coming months looks almost certain. This is reflected with consensus estimated earnings growth of just 2% this year.
The S&P 500 currently trades at approximately 17x forward earnings, generally in line with the 10-year average. It is worth noting that in the case of a recession, stocks tend to bottom several months before other indicators, like earnings, bottom.
Trying to guess the bottom of any market, though, is an impossible task. It's better to focus on opportunities for long-term success whenever they arise, such as with the three companies profiled in the April 2023 issue of the Investor Advisory Service: a large cap Internet company, a midcap healthcare facilities operator, and a midcap rental business. Each has the ingredients to offer investors above-average returns in the next half-decade.
The commentary has been excerpted from the issue of Investor Advisory Service published in late March. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 13th consecutive year for outperforming every up and down market cycle since 2002.
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