It seems like a long time ago, but it has only been six weeks since we wrote about bank failures and what the Federal Reserve would do next. Well, as it turns out, not much has changed over those six weeks, as it was more of the same. To start with, First Republic Bank went into receivership last weekend, becoming the third bank to fail in the U.S. This time around, JPMorgan Chase was quick to strike a deal for most of their assets and certain liabilities while guaranteeing insured and uninsured deposits. Moving to the Fed, the Federal Open Market Committee decided to raise rates another quarter point to 5.25%. While this was a highly telegraphed move, the continued turmoil in the financial sector begs the question: doesn’t the FOMC know that moderation is the key to life?
While First Republic was the latest bank to fail, it was far from the only bank impacted this week by the continued anxiety in the sector. Regional banks were under extreme pressure all week, with the S&P Regional Banking ETF (KRE) dropping ~10% in just five days. And while that is severe, it also doesn’t quite illustrate the freefall that a few specific banks experienced, specifically PacWest Bancorp (PACW) and Western Alliance Bancorporation (WAL), which were down -43% and -27%, respectively, in just one week. These banks are now trading below their March 2020 lows, when there were immense unknowns regarding COVID and how it would impact humanity and the economy. All of these numbers illustrate the considerable fear there is, particularly in the smaller regional banks, about the possibility of continued contagion in the banks. In today’s world, where much of banking is digital, and customers can move funds immediately, it is imperative that confidence be restored to the system. And it should go without saying, the sooner, the better.
And that brings us to the Fed, which, while they did what virtually everyone expected them to do, it doesn’t mean they did what many people think they should have done. With the 10th rate increase since March 2022, they have raised rates faster than ever in modern history (see the image below, which does not include the most recent increase). Increasing rates was necessary, as the alternative (higher inflation for longer) was unacceptable, as it causes pain to most households and disproportionately hurts the most vulnerable. However, a little more patience would be a good thing, as the record pace of rate hikes has clearly taken its toll. In addition, the Fed acknowledges the lagged impact of these increases has yet to be fully realized.
Nevertheless, they found it necessary to increase rates again, even in the face of tighter credit conditions due to the banking issues. At the very least, they did try to alleviate some concern about the banking industry by saying, “The U.S. banking system is sound and resilient.” And while the line was clear, it wasn’t enough to stem the downward momentum in bank stocks, as the slightest rumors dramatically impact the most sensitive regional banks. Only time will tell if this last rate hike was one too many, but since moderation is usually the key in life, this final rate hike was probably unnecessary.
Two final items this week:
1) If you are still using a savings account that is paying you a measly 0.01% (or, really, anything less than 3.5%), please get in touch with us, and we can help walk you through some better options.
2) This is a mind-blowing statistic illustrating just how big Apple (AAPL) is, with a $2.7 trillion market cap. During their earnings release this week, they announced a new share buyback program, which equates to 3.4% of their market cap. This repurchase program alone is bigger than about 420 of the 500 companies in the S&P 500.
Economy
- U.S. equity markets had a wild week ending May 5, with the S&P 500 down -0.8%, the Nasdaq up +0.1%, and the small-cap Russell 2000 down -0.5%. There were a few big releases this week, but it was the First Republic failure over the prior weekend that set the tone.
- In April 2023, the U.S. economy unexpectedly added 253k jobs, surpassing the predicted 180k. Job growth continued in various sectors, including professional and business services (43k), health care (40k) with a focus on ambulatory services (24k), leisure and hospitality (31k), primarily in food services and drinking establishments (25k), and social assistance (25k).
- While the April figure was well ahead of expectations, it follows the March number, initially reported at 236k, but was revised sharply lower to 165k. This also compares to the average monthly increase of 290k in the previous six months.
- The unemployment rate in the United States dropped to 3.4% in April 2023, equaling a 50-year low of 3.4% observed in January and falling below market expectations of 3.6%. The number of unemployed individuals declined by 182k to 5.66 million, while employment levels increased by 139k to 161 million. Meanwhile, the labor force participation rate remained steady at 62.6%.
- The S&P Global U.S. Services PMI for April 2023 dropped to 53.6 from an initial estimate of 53.7. Despite the slight adjustment, it still indicated the most significant growth in the services sector in a year, driven by accelerated expansion in output, new orders, and employment.
Stocks
- U.S. equities were in negative territory. Energy and Communication Services led the decline, while Technology and Utilities outperformed. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 1 basis points to 3.44% during the week.
- U.S. bond markets were in negative territory this week while International bond markets were negative.
- Government bonds led for the week, followed by high yield bonds and corporate bonds.
