Hope you are all doing well. The markets had a bad week. All the major averages finished the week with losses. The Dow fell 4.44% to post its worst weekly performance since June. The S&P dropped 4.55%, while the Nasdaq lost 4.71%. This weekend marks the three year anniversary of the Covid shutdown. I have broken down this week’s update using some of the better Covid related social media posts.
While I am not yelling to stay in the house. I am pounding the table on staying in your stock investments. This bear market is now 298 days old. Tha puts it just a few days shy of the average age of a bear. The length of a downturn by itself, does not signal a bottom. However it is important not to ignore science, to borrow Covid speak. History tells us this downturn will come to end, just like every downturn that has come before it. Why is it I remain optimistic that the markets will turn the corner in the next few months? Three reasons:
- A Fed pause: I think the Fed still has about 3 more rate hikes and it seems the market is finally realizing that which is a good thing. I believe they pause with the hikes late spring or early summer. The market has largely been driven by the Fed and is a coiled spring just waiting for rate hikes to stop.
- The Debt Ceiling will be a non-event: Congress will not let the U.S. default. I truly believe a deal likely gets done, probably in the 25th hour. The debt ceiling will cause volatility in the lead up. Once a deal gets done, and it will have to get done by summer to avoid default, that weight will be lifted.
- Shallow recession: The economy will enter recession but it won’t be as bad as markets are anticipating. Long and deep recessions are fueled by unemployment. The labor market will not deteriorate enough for the recession to be long lasting. The reason for my belief is that 10,000 baby boomers reach retirement age every day. Many are exiting the workforce and based on demographics there are not enough people to fill those jobs. Which keeps unemployment artificially low and causes wage growth as younger employees step up into more senior roles.
Friday’s news brought painful memories of the financial crisis. The market is reflecting concern that we could go through another period of seeing banks fail. The failure of California lender Silicon Valley Bank on Friday sent shockwaves throughout the market and caused the Regional Bank index to go down about 16% for the week. It was the biggest bank to fail since 2008. It’s too soon to make comparisons and it is unwarranted at this stage. Credit risks should not be taken lightly as economic conditions will likely get worse. That being said, SVB is a very small institution. It has $200 billion in US assets which represents a very small portion of the $19.8 trillion U.S. banking system. SVB is not too big to fail and there might be a few others that fail before things improve. I think at this point it is best to view this as an isolated disruption. While some other higher-risk or smaller institutions may meet a similar fate, the risk does not seem systemic. The overall U.S. banking system remains very well capitalized and it’s unlikely that the SVB domino falling causes a chain reaction.
Just like being able to blow out candles on a birthday cake, we took for granted almost 4 decades of relative price stability. Inflation like Covid does not want to go away. Inflation will persist as long as consumers continue to be willing to spend. The market is hoping for any data that shows inflation is cooling. On the surface the February jobs report released this week showed strength: the economy added 311,000 jobs. The number of jobs added is not the important figure to look at. What impacts consumer spending is overall unemployment and wage growth and while both those numbers remain strong they did soften from January. Unemployment went from 3.4% in January to 3.6% in February. Wage growth similarly went down by a tenth of percent month over month. It’s too soon to declare it a trend. However, if we see those two figures continue to soften it will translate to consumer spending in the form of reduced demand and prices will start to come down.
If you’d like to speak about your investments or your plan, my calendar link is below and you can schedule a phone or zoom appointment at any time.
