Fed Decision Time Following Bank Struggles

This week the Fed will decide on whether they continue hiking rates or pause

Author

Mark Roussin
March 20, 2023

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Market Talk ⏪

After a week in which saw two bank failures, the stock market shook off any fears of another potential financial crisis after the Federal Reserve stepped in and backed all deposits at those banks. Last week, the assault on regional banks continued as First Republic saw its shares fall more than 70% on the week in which several large banking institutions agreed to infuse $30 billion into First Republic, however, the stock couldn’t shake the selling.

In addition to heavy volatility around the banking sector, we have also come to the week in which the Fed will make another potential rate hike. Prior to the bank failures and troubles we have seen, I believe it was a far gone conclusion that the Fed would hike rates another 25 basis points this week. However, the banking troubles have changed some analysts and economists thought process as to what might happen.

I personally still believe a 25bps hike is going to happen and the futures market has a 70% chance of that happening. This news from the banks have some believing the Fed cannot add anymore stress to the financial sector, which is why some believe the Fed will pause.

There are still a lot more questions than there are answers, which could lead to a volatile week in the markets.

I have had many ask why I am so pessimistic in the near term. Reason being, valuation. We are still working through the effects of high inflation, supply chain issues, and the impacts of rate hikes. In addition, we are seeing record debt levels from consumers, which is signaling a weakening consumer. The labor force still appears to be strong, but if that too breaks, we could see the stock market retest the October lows.

Given all that, the S&P 500 still trades at a P/E ratio of 20.9x, extremely elevated. The average for the S&P 500 is closer to 16x. As such, there is not much of a case for further multiple expansion, also, analysts continue to cut earnings estimates for 2023, which would further increase the P/E ratio even more. The only way to bring things in line would be through a stock sell-off.

Last week Yardeni Research came out with their latest 2023 earnings estimates for the S&P 500 of $225. This would equate to a forward P/E ratio of 17.4x. This ratio is at least closer to the index’s long-term average, but still elevated nonetheless.

The S&P 500 closed last week at $3,916. A 15x forward multiple implies the S&P 500 would have to drop to $3,375, implying a near 15% move lower from current levels. This certainly does not seem out of the question that the S&P 500 could fall below the October lows, especially if we see the labor force start to crack.

Fed will give its statement and projection on Wednesday, along with a briefing from Fed Chair Powell shortly after. In addition, we will get an update on existing and new home sales and new data surrounding initial jobless claims. Nonetheless, we are embarking on another HUGE week for the stock market. Have your powder ready for any opportunities that may present themselves.

In other news, we have seen a resurgence in Bitcoin, with the cryptocurrency up 34% during the week and up 60% on the year. It is interesting to see the banking sector struggle and Bitcoin come out the winner. Investors may be opening up more to the idea of digital assets and trusting less on the traditional banking sector.

In terms of international news, oddly enough it deals with the banking sector, embattled Swiss bank Credit Suisse was under intense pressure as investors were losing confidence in the bank before the Swiss government stepped into help, but later on Sunday, it was announced that UBS would step in and acquire the bank in an all stock deal for $3.2 billion.

Let me know your thoughts in the comments section below regarding this weeks write up and your thoughts on this week ahead.

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US Markets 🇺🇸

Here is a performance summary for US Equities:

Here is a look at US Treasuries:

The Fear & Greed Index measures market sentiment based on the following seven factors: put/call ratios, junk bond demand, stock price breadth, market volatility, stock price strength, safe-haven demand, and market momentum.

When it comes to the Fear and Greed Index, how quickly things can change in a matter of days. A few weeks ago we saw a big swing from EXTREME GREED to EXTREME FEAR, which is still where things stand as of the close of trading on Friday. Currently, the index has a reading of 25, which is slightly up from the prior week reading of 23.

Earnings on Deck 💰

The earnings reports for the week are slow in terms of notable companies.

Dividend News 📝

Here are some notable analyst upgrade/downgrades from the previous week:

  • JPMorgan Chase downgrades British American Tobacco to neutral from overweight

  • Wells Fargo upgrades JPMorgan Chase to overweight from equal weight

  • Wells Fargo upgrades Eli Lilly to overweight from equal weight

  • Wells Fargo upgrades Amgen to overweight from equal weight

  • Citi upgrades Charles Schwab to buy from neutral

  • Credit Suisse upgrades Charles Schwab to outperform from neutral

  • Argus downgrades Norfolk Southern to hold from buy

  • Stifel upgrades FedEx to buy from hold

  • Susquehanna upgrades Qualcomm to positive from neutral

  • Wells Fargo upgrades Progressive to overweight from under weight

  • Morgan Stanley upgrades Nvidia to overweight from equal weight

This Week 📆

Monday

  • Quarterly financial report

Tuesday

  • FOMC begins its meeting

  • Existing home sales

Wednesday

  • FOMC statement and projections

  • Fed Chairman Jerome Powell briefing

Thursday

  • Initial claims

  • New home sales

Friday

  • Durable goods

  • St. Louis Fed President James Bullard

  • S&P Global Manufacturing PMI

  • S&P Global Services PMI

Other Resources 📺

If you have not done so yet, definitely check out my growing YouTube community where I publish weekly videos on Dividend Stocks I am looking at.

Here is a look at my latest video: 5 Forever Dividend Stocks:

Here is the other video I published last week: 5 Fast Growing Dividend Growth Stocks:

Here are a few others of my latest videos:

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Have questions? You can email me directly at [email protected].

Happy Investing!

Mark

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