Stocks Remained Resilient in the First Quarter
Now it was not a great quarter, but considering the banking failures and interest rate hikes, equities were remarkably resilient. The gain of 7% or so in the broad market average was welcome. The tech-laden NASDAQ was up 17%. Recall the broad average was down 19% last year.
Gold was up about 9% and bonds as measured by the I shares Bond Aggregate were up about 3 1/2%.
Readers might remember that stocks broke upward out of a bear trend, then failed and dropped back below the trend, only to once again scramble back above major moving averages and trendlines. Whew!
On March 22, the CNN Fear and Greed gauge hit a low of 22, an extremely oversold reading for sentiment. As we write, it has rebounded back to 50, which is a neutral reading. The low for the quarter in terms of price came on March 13, followed by a sharp rebound. But the swing in sentiment shows just how rapidly minds are changing in just a two-week period.
Apparently, Mr. Market figures the FED will not be raising rates anymore because the FED will not want to risk aggravating the banking crisis further. Traders seem anxious to get back to the days of cheap money. It is all they have known for almost 20 years so you can’t blame them.
Surely the banking problems will force the FED to pivot. However, with inflation persisting, the FED either gives up on inflation or risks further banking difficulties. Choosing inflation is not necessarily going to be great for the market, although we admit, that seems to be the working assumption right now.
In fact, the behavior of the market is very similar to what gave us the recent top. During the recent rebound, once again a handful of high-capitalization tech stocks (much like the FANG stocks of previous fame) are creating the bulk of the gains for the index. In fact, the equal-weight S&P, which removes the distortion of the FANG stocks, was up only half of the amount of the regular index.
Jesse Felder, an astute market analyst points out that the combination of Apple, Nvidia, Microsoft, Meta, Tesla, Amazon, Alphabet, Salesforce, and AMD have contributed ~160% of the S&P gains so far this year.
Without just this handful of companies, the averages would be negative.
Generally speaking, a healthy market shows broad participation in price improvement. Narrow price strength, particularly in such small numbers of huge companies, is not healthy. So, while the percentage recovery shows a decent quarter, the way we are getting it is unhealthy. Bulls better hope the price strength spreads soon to many more companies.
Moreover, those companies creating most of the gain are extremely expensive in terms of their market metrics. It would be unusual, to say the least, for companies that are already extremely expensive, to be able the lead the market higher on a sustained basis.
The banking crisis seems to have come and gone rather quickly, too quickly we think. Deposit outflows from banks continue, which suggests the problem is not over. Not only do continued withdrawals risk ensnaring marginal banks in liquidity problems, but deposit outflows will also cause banks to be more reticent to lend except to the most credit-worthy borrowers. That will tend to deny access to credit by the marginal borrower. Couple that with higher interest rates already in place, and it would seem this will be a factor to slow the economy. Some people will not be getting credit when they want and need it and many have substantial debts to roll over.
In addition, OPEC suddenly and surprisingly announced production cuts, which will add to the price of energy, which will most likely add to the inflation problem, which will make it difficult for the FED not to follow through with more rate hikes.
Japan has said they will be buying Russian oil, weakening the Western Alliance insofar as their using sanctions to bring Russia to heel.
The political front has not improved much either. Worries about the debt ceiling crisis have also faded fast as well but the problem remains unresolved. Speaker Kevin McCarthy says the GOP seeks concession but the White House for two months has refused to even talk to House Republicans. In fact, this problem is still very much in play and the White House has gone beyond brinksmanship into what appears to be a political coma. Democrats seem extremely confident that Republicans won’t be able to stick together.
If Republicans can stick together and propose common sense cuts, such as a return of government spending to pre-Covid levels, they could put the Democrats in the position of threatening default on the debt of the US.
Meanwhile, another warning was issued suggesting that Social Security will run out of money in just a decade.
A number of countries are taking preliminary action to dethrone the US dollar as the reserve currency and oil payment currency of the world. This seems like an arcane subject to many but it is fraught with serious implications.
Right now, our government, and only our government, can print money to satisfy foreign debtors and pay for oil. No one else can do that. It is doubtful the average voter understands how serious it will be for our standard of living if the dollar is knocked from its pedestal.
In summary, the gains are welcome but are on shaky grounds. Most of the problems plaguing the market remain unresolved.
