Tucker Financial Weekly Market Review: March 31, 2023

Markets put a bow on a week, a month, and a quarter last week by putting more distance between today and the mid-March banking turmoil. Large cap stocks are now trading at levels above pre-SVB marks while small caps (more financials and credit risk sensitivity) continue to struggle. Key events during the week included Congressional Fed testimony and typical post-FOMC week Fed speaking circuits alongside a relatively important economic calendar. The S&P 500 turned in a third consecutive weekly gain (+3.5%), with healthy March (+3.7%) and first quarter (+7.5%) gains as well. International developed markets also turned in a positive week (+3.9%), month (+2.4%), and quarter (+9%). Interest rates moved higher across the curve last week, likely correcting the sharp reaction to banking turmoil mid-month, while commodities rallied 4.5% and the USD weakened slightly.

• Is the 60/40 portfolio in comeback mode? March delivered gains for a fourth time in the past six months and closed out a second consecutive quarterly gain of approximately 4% for Q1.

• Mega cap (index heavy) growth stocks have continued to lead markets higher, driving large cap stocks back above pre- SVB levels while small caps, with a larger share of financials and more sensitivity to high yield credit spreads, have lagged significantly in March.

• Monitoring bank health metrics such as deposits, deposit ratios, and capital ratios is important. Additionally, monitoring Fed emerging lending programs to banks are showing Fed discount window borrowing fell $22b last week while BTFP rose $11b for a net $11b liquidity removal.

• Depositor behavior has clearly been pushing bank deposits into money funds wherein we see the increase in the Fed Overnight Reverse Repo facility matching money fund flows and the YTD decline in deposits almost exactly matching the move higher in money fund balances.

• The FDIC completed the bank carcass sales of SVB to First-Citizens Bank & Trust and SBNY to NY Community Bank with partial loss sharing and steep discounts of over 20% on loan purchases.

• Fed speakers (Barkin and Collins) and Congressional testimony from Vice Chair Barr left investors with some hawkish soundbites, finger pointing at inept bank management, and many questions surrounding how much the tightening of lending standards will dampen future growth.

• Goldman noted last week the industry composition of bank lending suggests a more cautious outlook for employment growth because leisure & hospitality and other service industries rely heavily on bank lending for funding.

• We’re at the important doorstep of first quarter earnings season where analysts have been busy lowering EPS estimates (-6.3%) by a larger than normal (3.8%) margin when you compare estimates from December 31 to March 30th.

• A big upside surprise in China’s service PMI reading of 58.2 versus 55.0 has investors hoping the reopening process will translate to a significant consumption boost.

• The February PIO (Personal Income and Outlays) report showed inflation slightly softer than forecast with YOY PCE headline and core inflation of 5.0% and 4.6% alongside MoM headline and core of 0.3%.
• The February PIO report measure of Personal Consumption Expenditures (+0.2%) and Personal Income (+0.3%) were both right in line with consensus.
• The final revision of 4Q U.S. GDP was revised downward from a 2.7% to 2.6% annual rate driven largely by a downward revision of 4Q PCE from 1.4% to 1.0%.
• Weekly jobless claims of 198k and the 4-week moving average of 198.25k both increased over the past week.
• The Consumer Confidence Index in March increased unexpectedly to 104.2, well above the spot forecast of 101 and an improvement over February’s reading of 103.4. However, the final revision of the U of M Consumer Sentiment index came down from 63.4 to 62.0.
• January’s Case-Shiller Home Price Index saw residential housing prices fall 0.2% MOM with a YoY change of +2.5%, below consensus forecast and in the low end of the range.
• Pending Home Sales in February increased 0.8% versus expectations for a 1.0% gain.