This is a free week
Due to the current turmoil in the financial markets, we are making this week’s post available to all
Where to begin?
Although it would seem otherwise and despite the abundance of negative news, the S&P 500 closed the week on the upside +1.43%. The NASDAQ Composite gained 4.41%. The Dow Jones however went negative for the week, down 0.15%.
Friday’s market close saw the S&P 500 down 43 points @ 3,916. The NASDAQ down 86 points @ 11,630 and the Dow losing 384 @ 31,861.
The news concerning the banking sector has been in the forefront since the previous week due to the government takeover of Silicon Valley Bank and Signature Bank. First Republic Bank, a minor headache earlier in the week that became a massive migraine by week’s end dropped 32.8% on Friday, helping to send shivers done Wall Streets collective backs. Candidly, the financial world has not experienced a week like this since 2008. Memories of turmoil in the banking sector has ignited fears of another global crises.
Regardless as to how Washington is trying to spin this current financial upheaval (We would not consider this a crises. Yet), it is far from over. This sobering news is based on the following: As of this past Wednesday (3/15) the Federal Reserve, through it’s authority, has loaned out $318 Billion to problem institutions! Putting that into perspective – it rose from $15.2 Billion the week before!! That is an increase of nearly 2,000%! In order to stabilize the economy during the pandemic, the Fed gave out $129 Billion and the last time this kind of help was needed from the Fed was in 2008! It is fair to say that the banking industry is in distress and scrambling for liquidity.
We posted two Market Alerts last week. The current situation with Credit Suisse was the cause for one of them. We are witnessing a spill-over effect in the global banking sector now. Remember the following - if you have money on deposit, it is safe. If you’ve invested in the bank’s stock itself, you are on your own.
The next big concern in light of these failures (and the sector as a whole) is for credit drying up for home builders. An avalanche of depositors have been moving money out of what’s referred to as ‘Regional Banks’ and placing it in the largest financial institutions for ‘safekeeping’. Coupled with a possibility of not having money to lend, mortgage lenders may not be able to finance new construction and the ripple effect on the economy cannot be overstated. According to Robert Dietz, chief economist at the National Association of Homebuilders, builders are worried “about their ability to obtain debt financing to acquire and develop lots. Most of that financing originates with the regional bank system, which is under some pressure given recent events.” Unfortunately, the US is already short 2.3 million homes, according to calculations done by Realtor.com.
In the world of investments, crises’ seem to occur simultaneously. Considering how intertwined many sectors are with each other this should not come as a surprise. Now we have a situation where the Federal Reserve is trying to reduce the inflation rate to it’s stated goal of 2% but, we are teetering on a full-fledged bank panic. Although the adjusted inflation rate for February came in at an expected (aka - hoped for) rate of 6%, down from 6.4% in January, the Fed is left to question if their March 22nd rate hike should proceed. It was just the previous week that Fed Chairman Jerome Powell, in speaking before the Senate Banking Committee, hinted at a more aggressive rate hike scenario. Now, with so much at stake in the banking sector, we very well may not see any rate hike at all in March, however this is truly anyone’s guess.
The S&P 500 is now below both it’s 200-day and 50-day moving average, as is the NASDAQ Composite as well as the Dow Jones and the Russell 2000 (Small Caps). Trading under these two moving averages is a very Bearish signal, indicating that lower lows could be upon us soon.
The Volatility Index (VIX), which we’ve referred to in past posts, is trending upwards meaning that the ‘average’ investor, as we began to see the previous week, is beginning to become (very) concerned. This indicator was showing hardly any uneasiness for the past months regardless of the ominous news that kept pouring out. Now however, it appears that people are becoming more anxious of the direction of the market. In simple terms, a number of 20 or below indicates investors are not very concerned. 30 and above indicates they are. For many months this number hovered around 20. The VIX closed Friday at 25.51. This is not only a quick move up but a significant bell weather as well.
Another signal we closely watch is what is known as the ‘Yield Curve’. An inverted yield curve (as it is positioned currently) happens when short-term Treasury Bonds pay a higher interest rate than long-term T-Bonds. Historically this indicates that not only is the stock market not feeling well but that a recession is coming. Current rates on the 1-year Treasury is 4.28%, 2-year – 3.81% and 10 year stands at 3.43%.
Amidst all the noise, the price of oil has come down 13%. Just a month ago the price of a barrel of oil stood at $76. Friday it closed at $66. Hopefully we’ll see a better-than-modest decrease at the pumps.
Home mortgage rates nationally are at 6.97% however shopping around should find a bit better rate. If you are in the market for mortgages, be aware that the current banking situation will cause a degree of tightening.
The standard comment most investors hear from their financial advisor is “Relax. Sit tight. The market will come back” during downtrends. Throughout our website, we talk about this. If someone is really not concerned about what their account is doing, or fairing, at any given time (we mean to be very serious and respectful here), then inaction is the best alternative. History does show that the US stock market is very resilient.
No one can predict when the stock market will hit a high or when it will hit a low. What can be done however, is to follow what’s known as ‘the trend of the market’. This is what we do at GaneWisdom/Market Edge. We do this by analyzing an abundance of source material such as market indexes, charts, global conditions, and much more.
Although the tradition of ‘buying and holding’ is certainly a common occurrence, we believe that a better alternative exists – trying to minimize large losses by taking small losses. Why would someone, we feel, give away the results of a major upswing in the market by just trying to make up losses? This is what happens when people ‘let their money ride.’ If you were to go back to the late 90’s – early 2000’s during the dot-com days, you would notice that too many investors gave away profits by ‘sitting tight’. As the dot-com bubble burst it was not uncommon to observe that the traditional investments (not only the high-tech stocks) fell by 30, 40, 50% and more. If your account was down 50% let’s say, what would your portfolio need to rise to break even? If you answered 100% you would be correct. 100% JUST TO BREAK EVEN!!!!
We have repeatedly spoken about “Panic Bottoms”. A Panic Bottom is where investors just can’t take anymore and throw in the towel and absorb huge losses. We have repeatedly referred to this Panic Bottom to be around 3,300 in the S&P 500. Right now, the S&P stands at 3.916. Should this occur, a decline of another 15% could materialize. Should this transpire, however, a tremendous buying opportunity could present itself.
Our theory at GaneWisdom/Market Edge is for investors to be positioned in Cash - money markets - during a falling or tumultuous market, avoid making up large losses and enjoy the increases as they transpire without waiting for their portfolio to go back to where it was, and then start to make money!
The current economic conditions that we now find ourselves, in this middle of March 2023, is one of confusion and if anything, lost direction. At least at the present time. To give away money in a falling market is, in our opinion, needless and, with respect, foolish. We encourage you to read any of our previous posts. We believe our past summaries will speak for themselves.
Though perhaps you currently have no-one guiding you or advising you in regard to your retirement portfolio, be it a 401k, 403b, IRA, Roth IRA – or even perhaps your mutual funds or variable annuities - know that with the analysis offered through GaneWisdom/Market Edge, you can navigate the direction of your account, on your own, while doing so with peace of mind.
In conclusion, there are just too many red flags flying at the present time to change our present mind-set. This takes into consideration that the Nasdaq is presently moving upwards. It would be, we believe, irresponsible to transfer anything into the tech sector at the moment as a ‘whipsaw’ ( a fast moving reversal) could happen quickly based on the current climate. Standing by our proven strategies, we therefore recommend:
Remain, or transfer into, a CASH (Money Market) position. Be vigilant for Mid-Week Market Alerts if needed.