Key Highlights
- The S&P 500® was up 3.51% in March, bringing its YTD return to 7.03%.
- The Dow Jones Industrial Average® rose 1.89% for the month and was up 0.38% YTD.
- The S&P MidCap 400® decreased 3.41% for the month, bringing its YTD return to 3.36%.
- The S&P SmallCap 600® was down 5.38% in March and had a YTD return of 2.12%.
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Market Snapshot
One must always try to find a silver lining to a storm. The S&P 500's total return for March was 3.67%, but the breakdown was more revealing. The 3.67% gain would have been 4.81% excluding Financials' 9.55% decline (it cost the index 1.13%) and it would have been 0.70% excluding Information Technology's 10.93% gain (it added 2.97% to the index, with Microsoft and Apple adding 1.72% and negating Financials' decline). For the Q1 2023 YTD period, the S&P 500's total return was 7.50%, and without Information Technology's 21.82% YTD gain (it added 5.34% to the overall index, with Apple and Microsoft adding 2.71%), it would have been 2.71%.
The banking events were severe: SVB and Signature are gone, and First Republic was down 89% for March. Credit Suisse had USD 17 billion of bonds completely wiped out, and the images of a run on the bank will likely stay with the regionals and investors for years, as Washington comes up with a new and improved cure. Banking issues, at this point in time, do not appear to be systemic, but withdrawals may lead to more failures.
The three "issues" were separate. SVB seems to be a traditional risk/maturity issue, which appeared to be a management failure and now also appears to be a regulatory one. Signature appears to be a portfolio issue. Credit Suisse has been having issues for years, with a UBS merger also discussed over the years. The current situation resulted in the arranged wedding (Deutsche Bank is still in motion).
I'm not belittling the event or the damage, but the market seems to have, and it has moved back to its issues—consumer spending, inflation, the Fed and profits. This is not the 2008-2009 banking situation and the market impact going forward at this point is expected to be tighter loan requirements, new regulations for regionals, lower margins for all deposit-related issues and an increased chance of a recession.
On a higher level, as U.S. Fed Chair Jerome Powell admitted, the current bank stress will tighten credit, with the result being "the equivalent of a rate hike or perhaps more than that." o, while the run was and is bad, it has slowed the economy directly and through additional concern. Absent more banking issues (runs), it appears to have reduced the need for prolonged Fed increases—so here we are talking about when the Fed will start its cuts.
Trading was noticeably active for March (the highest daily average in two years), as it differentiated business lines. The S&P 500 posted a 3.51% gain (up 7.03% YTD; Q4 2022 was up 7.08%). Of the 11 sectors, 7 were up (Information Technology was the best, up 10.87%, while Financials was the worst, down 9.74%). Breadth was positive, as 263 issues were up (32 up at least 10%) and 240 were down (53 down at least 10%). However, in Financials, 14 of the 65 were up and 51 were down, with two regional issues going into receivership (SVB Financials and Signature Bank), as one regional declined 89% for the month (First Republic Bank).
Perhaps just as significant as the sudden post-March 8 change in the banking environment was the market's view of the Fed (it increased rates 0.25% this month), with the market now split on whether there will be one more 0.25% hike at the May meeting or if we saw the end of rate hikes this month. The focus is now on when the Fed will start its interest cuts; predictions start in June, compared with the Fed dot matrix that started in 2024. Before we get there, however, the market will need to go through Q1 2023 earnings reports (17 off-fiscal issues have already reported, with 15 beating on earnings and 13 on sales), which opens with the big banks (April 14: Citibank, JPMorgan Chase, Wells Fargo) and regional ones (April 13: First Republic Bank). Analysts will be looking for reserves (bad debt allowance) and any market-to-market notes for the held-to-maturity securities, as well as commentary on expected new loan policy changes and levels. At this point, the Q1 2023 operating estimates have declined (-5.8%) and are predicting a slight (0.3%) decline over Q4 2022, with the traditional question being whether estimates have declined enough so that the results can be declared a beat and a victory, to which the historical answer has been yes.
