What does the market think?

What does Silicon Valley Bank’s failure mean? Are we heading into a recession? Is the Fed done raising interest rates? Will the stock market fall? Everyone has an opinion that is reflected in the market. So let’s see what the market says.

People are rightly concerned about how SVB’s downfall might affect other regional banks. There is full panic in those names.

But for now, at least those fears appear to be contained. If there was real panic in the market beyond the affected names, you would expect stress in junk bonds, senior bonds, investment grade bonds and the Vix. We don’t see any of that right now.

While I find it interesting to watch the market’s reaction to an event, it’s important to remember that the market doesn’t always get the story right and things can change very quickly. Not even two weeks ago, for example, I wrote a post saying:

“There is an interesting dynamic at play where “everyone” seems to be bearish on stocks except the stock market itself.”

I looked at the strength in things like industrials and small caps and semiconductors and asked if maybe the market knows something we don’t. To be fair, I don’t think the market saw SVB coming, but that’s my point. I assume the market is always right, but sometimes it isn’t.

The usual suspects are relatively calm, there is absolute pandemonium in the fixed income market. A few weeks ago, the market was pricing in a 79% chance of a 50 basis point rate hike. Now it says there is a 0% chance it will happen. Zero…period…zero. And just last week there was a 0% chance that the Fed would pause. Now it looks like a coin toss.

Here’s the same chart, GIF for your viewing pleasure. (h/t @nick)

If we go out to December, there is now a 1 in 4 chance that fed funds will be 100 basis points lower than they are today!

The volatility around the rates for December is astronomical.

And perhaps that is the reason why the stock market is holding up relatively well. It knows that the feed is ready. But the narrative can quickly shift from “whew, it’s done” to oh no, “we’re going into a recession.”

One of the biggest takeaways for me over the past few days is that risk is what you don’t see coming. It’s never what the headlines say.

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