A pair of large caps does the market’s heavy lifting

Despite the most significant banking crisis since 2008 and 2009, the S&P 500, Nasdaq and Nasdaq 100 ended the week with gains. The Russell 2000 exchange-traded fund (IWM), which contains many small financial items, was hit with a loss of more than 5%, and the Dow Jones also ended in the red.

This was another example where a small number of big caps outweighed extremely bad action in thousands of smaller stocks. Names like Microsoft (MSFT), Nvidia (NVDA) and Coinbase Global (COIN) soaked up money flowing out of banks, oil and small caps. Precious metal stocks also benefited from some of this rotation.

The action was even more painful when the celebration of a resolution to the banking crisis took an ugly turn on Friday. The Regional Bank ETF (KRE) ended at its lowest close since fall 2020. Investors hoped that swift action by federal agencies would restore confidence in the financial sector. They may have stopped bank runs, but they didn’t solve the valuation problem. Banks received the short-term liquidity they need to handle the withdrawal of deposits, but they are still under extreme pressure due to the heavy burden of higher interest rates.

The most notable action this week was a major shift in expectations for upcoming Fed action. Not long ago, the market was extremely confident that the Fed would raise interest rates by 0.5% this coming Wednesday, but after today’s poor performance, there is a strong possibility that the Fed may forego a rate hike altogether.

The Fed must deal not only with the carnage in the banking system, but also with the increased likelihood of a recession. These problems may help the inflation issue, but the labor market is still quite strong and inflation is not going away quickly or easily.

Bulls celebrated the very small pockets of strength in some semiconductor and AI stocks, but this is not a healthy market. The Fed is in a very difficult position and the market is unlikely to be happy with it no matter what it does. If the Fed does not raise interest rates, it could be perceived as panic. If it raises interest rates, it could make the balance sheet problems for the banks even worse.

Year-to-date results for the largest area of ​​the market show how chaotic things have been so far in 2023: S&P 500: +2.01%; Nasdaq: +11.12%; Dow Jones: -3.89%; small caps: -1.42%; gold +5.30%; US dollar 0.80%; oil: -14.84%; bitcoin +50.68%.

It is a good time to be patient and have high levels of cash.

Have a nice weekend. I’ll see you on Monday.

(MSFT is a holding in the Action Alerts PLUS members club. Want to be alerted before AAP buys or sells stocks? Learn more now.)

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