March Madness might better be applied to Fed policy and Q1 market behavior versus the NCAA basketball tournaments. Markets have swung from one extreme to another.
January markets were driven higher in anticipation of a potential pause by the Fed in hiking rates. But in February, the Fed stated it was prepared to keep rates “higher for longer”. The equity markets sold off erasing much of the January gains.
Then, on March 10th, out of nowhere, came the second largest bank failure in U.S. history, which triggered fears of a banking crisis and recession. By the end of March, bank regulators quickly put together a new loan program allowing banks to cover withdrawals without having to sell their US Treasury and Mortgage bonds at depressed prices due to the rapid increase in interest rates. Bank regulators also agreed to “insure” both insured and uninsured deposits. That response provided tremendous stability.
At The Trust Company we were not surprised by the impact rising rates had on bank investment portfolios. Our clients and our company both felt some of this pain during 2022, but we hadn’t purchased those investments with money borrowed from depositors! Eventually, these bonds and Treasury securities will return to par value. So, the SVB bank failure didn’t really “come out of nowhere!”
By March 31, the fear of a bank run subsided, and the market went back to pricing in a pause in rate hikes and perhaps actual rate cuts by year end. Stocks reacted positively! The NASDAQ ended up 6.7% in March and 16.8% for the quarter, its best return since 2020. The S&P 500 was up 3.5% in March and 7% for the quarter.
The expectation of lower rates is reflected in the inverted yield curve that nearly always precedes a recession. Those short-term rates should decline when consumer loan and purchasing demand declines. So, bond and CD buyers are now willing to accept slightly lower rates for longer terms anticipating that rates will decline and they will have locked in even those lower rates. We still have a tight labor market and an unchanged unemployment rate of 3.6%. But consumer demand has also declined over the past few months. So, March Madness may well be with us a bit longer as the bulls close out Q1.
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