Relief Rally Ahead?
Never take the news at face value. Hidden agendas lurk behind the headlines, with proxies serving as mouthpieces for certain interest groups. And as surely as Aaron spoke for Moses, Goldman Sachs (NYSE: GS) speaks for the Federal Reserve.
It’s telling that in a March 12 note, Goldman Sachs stated: “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22.” The investment bank had previously expected the Fed to hike rates by 0.25% (25 basis points).
Goldman Sachs alumni are honeycombed throughout government, including the Fed’s Board of Governors. If the firm’s assertion turns out to be true, we could witness a substantial relief rally next week.
In recent days, as volatility in the financial sector has increased, expectations for Fed rate hikes have come down. As it stands now, the consensus continues to expect 0.25% rate hikes at the March and May meetings, which would bring the fed funds rate to about 5.0%. However, the combination of cooling inflation and banking stress is fostering the expectation that the Fed will pivot to rate cuts soon after.
Regardless, in the context of Goldman Sachs’ low-ball prediction, it seems that a hike of 0.50% next week is off the table.
The projected peak rate of 5.0% is substantially lower than the expectation earlier this month that the Fed would boost rates as high as 5.75%. What’s more, Wall Street now expects the Fed to start cutting rates as soon as the June meeting.
Stocks rebounded Thursday, as troubled banks such as Credit Suisse (NYSE: CS) and First Republic (NYSE: FRC) received infusions of cash from large financial institutions.
The Swiss National Bank provided Credit Suisse with $54 billion. A coterie of Big Banks, including JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC), said they would support beleaguered regional bank First Republic with $30 billion in aid.
But volatility continues. Weighed down by lingering bank sector worries, the main U.S. stock market indices closed lower Friday as follows:
- DJIA: -1.19%
- S&P 500: -1.10%
- NASDAQ: -0.74%
- Russell 2000: -2.56%
The NASDAQ and S&P 500 finished in the green for the week, the Dow Jones Industrial Average in the red. Global stocks, especially in Europe, swooned as well on Friday and for the week.
It’s interesting to note that the panic over Silicon Valley Bank (SVB) was in large part fueled by social media chatter. As a notable example, the following March 12 tweet, posted by entrepreneur Kim Dotcom, was viewed by 2.4 million people and retweeted nearly 3,500 times:
SVB collapsed Friday after depositors ran on the bank, which didn’t have sufficient cash on hand to cover withdrawals.
SVB made the mistake of investing heavily in long-term bonds. As the Fed boosted interest rates to fight inflation, the price of those bonds tanked, taking SVB down in the process.
After SVB went belly up, depositors were assured by federal regulators that everyone would be made whole by the Federal Deposit Insurance Corporation (FDIC), even for deposits that exceed the FDIC’s $250,000 limit.
These regulatory steps have stemmed the banking crisis, but they could pave the way for new problems down the road.
The term “moral hazard” comes to mind. That’s when there’s a lack of incentive to guard against risk, because the party taking the risk is protected from its consequences. That’s a sobering thought, in an era when a single tweet can trigger a bank failure or geopolitical incident.
As the banking crisis unfolded this week, investors have sought safe-haven assets, pushing U.S. government bond prices higher and yields lower. This trend toward defensive assets should continue until we get greater clarity on the economy and interest rates.
So even if we get a relief rally next week, the investment landscape will remain littered with landmines.
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John Persinos is the editorial director of Investing Daily.