Fears from banking sector might be about to spread elsewhere
Following the last FOMC meeting, notable developments in the stock market took place. First, volatility increased significantly among regional banks, seeing shares of companies like PacWest Bancorp, Western Alliance, Metropolitan Bank, and Home Street plunging by high double-digits. These declines, however, did not last long, and financial institutions recovered much of their post-FOMC losses in the past three trading sessions. Then yesterday, these companies soared during the pre-market and got sold off during the regular trading hours.
Interestingly, these erratic moves follow Jerome Powell’s reassurance (from a week ago) that the banking system is “safe and sound” and making progress toward recovery. While this might be true for major banks that are well-positioned to weather the storm, regional banks are still at risk of spreading contagion that can lead to a domino effect (similar to the one we saw last year in the cryptocurrency market with the bust of Celsius Network, Voyager, FTX, etc.). As a result, this might lead to more broad fear in the markets, especially once more economic indicators will start to worsen.
On the topic of these indicators, so far, an extremely low level of unemployment has been used as an excuse by many economists to say there is no recession ahead (despite history being full of examples when extremely low unemployment preceded the start of a recession). Therefore, we do not consider low unemployment a reliable indicator to assess that the U.S. economy will dodge a recession (also bear in mind that a person not actively seeking a job is not counted as unemployed). Overall, we would say that labor market data show a lot of discrepancies that could suggest otherwise (a growing number of continuous jobless claims, a declining number of multiple jobholders, etc.).
In addition to that, rate hikes tend to affect the economy with a lag (often noted as a lag of between 6 to 18 months), meaning the economy still has not felt the effect of the number of previous rate hikes, at least since November 2022 (equal to at least 100 basis points). With the FED’s target of a 2% inflation rate still being very distant, we think interest rates will be required to be held higher for much longer than the market is pricing in at the moment. In fact, we believe there is still a very high chance there won’t be any rate cuts in 2023. Accordingly, we expect this realization among investors to lead to a big repricing event we mentioned before. As such, our price target for SPX stays at $3,500.
Illustration 1.01
Illustration 1.01 shows the price action of particular banking stocks in yesterday’s pre-market.
Illustration 1.02
Illustration 1.02 displays the unemployment rate in the United States. Yellow arrows indicate extremely low levels of unemployment that preceded lasting periods of elevated unemployment.
Technical analysis gauge
Daily time frame = Neutral/Slightly bearish
Weekly time frame = Neutral
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Illustration 1.03
Illustration 1.03 shows continuous jobless claims. The metric is up approximately 40% since September 2022 and about 10% since the start of 2023.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
Interestingly, these erratic moves follow Jerome Powell’s reassurance (from a week ago) that the banking system is “safe and sound” and making progress toward recovery. While this might be true for major banks that are well-positioned to weather the storm, regional banks are still at risk of spreading contagion that can lead to a domino effect (similar to the one we saw last year in the cryptocurrency market with the bust of Celsius Network, Voyager, FTX, etc.). As a result, this might lead to more broad fear in the markets, especially once more economic indicators will start to worsen.
On the topic of these indicators, so far, an extremely low level of unemployment has been used as an excuse by many economists to say there is no recession ahead (despite history being full of examples when extremely low unemployment preceded the start of a recession). Therefore, we do not consider low unemployment a reliable indicator to assess that the U.S. economy will dodge a recession (also bear in mind that a person not actively seeking a job is not counted as unemployed). Overall, we would say that labor market data show a lot of discrepancies that could suggest otherwise (a growing number of continuous jobless claims, a declining number of multiple jobholders, etc.).
In addition to that, rate hikes tend to affect the economy with a lag (often noted as a lag of between 6 to 18 months), meaning the economy still has not felt the effect of the number of previous rate hikes, at least since November 2022 (equal to at least 100 basis points). With the FED’s target of a 2% inflation rate still being very distant, we think interest rates will be required to be held higher for much longer than the market is pricing in at the moment. In fact, we believe there is still a very high chance there won’t be any rate cuts in 2023. Accordingly, we expect this realization among investors to lead to a big repricing event we mentioned before. As such, our price target for SPX stays at $3,500.
Illustration 1.01
Illustration 1.02
Technical analysis gauge
Daily time frame = Neutral/Slightly bearish
Weekly time frame = Neutral
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Illustration 1.03
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
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