Post Fed Meeting 3/24/23
Two weeks ago, the collapse of Silicon Valley Bank (SVB) triggered the current financial crisis, and these aftershocks continue. The severity of the shock is far more evident in the credit/rates markets than it is in equities. The S&P 500 is up +2.3 percent since March 10 th (SVB failure) led by Technology/FAANG stocks. We view the Fed’s decision of a 25 basis point increase as overall dovish even though I disagreed with the logic behind the decision. In the press conference, Powell made it clear the Fed is now closely monitoring the knock-on effects from the current banking crisis. Powell used the word “tight’ in regard to policy/lending 23 times compared to 8 times in February. In previous Fed meetings the committee was focused on labor market tightness which was only brought up two times in Wednesdays press conference.
To us, this means the Fed is focused on the impact of the banking crisis and its associated ripple effects on the economy via credit contraction and lower consumer confidence. In fact, the Fed even noted this crisis is equivalent to a tightening of monetary policy. We think the Fed trajectory has now moved lower. We think at most there might be one more hike before year end but even that could be doubtful as we think inflation is rolling over. Thus the Fed does not need to raise rates going forward. In fact, the bond market is calling for interest rate cuts before the end of the year.
Here are 5 reasons we believe that technology stocks will continue to hold up and outperform. You might wonder, why has the S&P 500 actually risen 2.3 percent when a credit crisis is underway. We don’t think this is entirely irrational. We can think of five reasons:
Fed pivot is underway, meaning no more hikes favoring Tech/FAANG stocks.
Inflation expectations dropping, which means lower rates, which means price to earnings multiple expansion.
Investors are looking for companies with a high degree of liquidity. Apple for example, has enough cash on its balance sheet to bail out any regional bank including SVB (if it wanted to). Mega-cap tech is flush with cash; hence the stocks have held up nicely.
Bank crisis is not systemic, even if investors are fearful.
There is almost nobody left to “sell” evidenced by the fact that money market cash balances exploded higher with $1.86 Trillion of retail cash on the sidelines. Note that this is more money in cash than the great financial crisis of 2008. This is not 2008.
Bottom line, we think the relative strength of equities is important. Look at the performance of assets since 3/10 (collapse of SVB). Four assets surged:
Bitcoin +41% (not a recommendation, just saying)
FAANG +11%
Gold +5%
Tech ex-FANG +5%
There it is. This is a flight to “safe” assets and leading this is Bitcoin and FAANG.