This morning, we received some news on the U.S. economy. At 8:30 A.M. (EDT), the Commerce Department reported that housing starts and building permits, which are strong indicators of future residential construction and home sales, came in better than expectations, but were still down sharply year over year in February. The Federal Reserve’s increasingly restrictive monetary policies in 2022, which pushed borrowing costs notably higher over the last 12 months, have hurt demand for housing and caused the homebuilders to significantly slow their pace of construction. The housing market was among the first sectors to feel the pain of the Fed’s aggressive tightening course, which has now spread to the banking industry (more below). Meantime, initial jobless claims for the week ending March 11th totaled 192,000, which is down from the previous week and still reflective of a tight labor market. We also learned that manufacturing activity in the greater Philadelphia area was negative for the seventh consecutive month in February.
The equity futures, which were mixed heading into the economic releases, have weakened on the reports and news that the European Central Bank has raised its benchmark short-term interest rate by a half-point.
The last several sessions on Wall Street have seen an increase in stock and bond market volatility. The turbulence was prompted by news that federal regulators had to take control of a few regional banks (Silicon Valley Bank and Signature Bank) due to a liquidity crunch and guarantee deposits at those institutions. This news has brought fears of a “contagion” across the wider lending sector and caused share-price declines for other stocks in the industry, though smaller, regional banks were the most affected. The banking stocks rallied some after word that the U.S. Treasury, the Fed, and the Federal Deposit Insurance Corporation (FDIC) would take steps to protect customers’ funds and help lenders maintain liquidity. Then there were worries about the financial health of Swiss bank Credit Suisse yesterday, and the volatility spiked again. The CBOE Volatility Index (or VIX), known as the “fear gauge,” jumped over the last week-plus of trading, as the banking industry turmoil raised questions about the strength of the global economy.
Banking worries have overshadowed some promising news on the inflation front. The Consumer Price Index report for February only showed a slight moderation in prices, but yesterday’s companion report from the Labor Department on producer prices was a more encouraging reading on inflation. The Producer Price Index fell by 0.1% last month after rising by 0.3% in January. Likewise, the annual pace slowed to 4.6%, significantly lower than the downwardly revised 5.7% increase registered in January. The more-benign inflation figures and the emerging banking crisis have raised sentiment that the Federal Reserve may pause on the interest-rate hiking front at next week’s two-day monetary policy meeting. There is a sense that the Fed’s most aggressive monetary policy tightening course in four decades—and resultant tighter credit market conditions—is responsible for the increased stress in the financial system.
Worries about the possibility of a looming recession have intensified. The Treasury yield curve remains inverted, oil prices continue to fall, and some smaller regional banks are collapsing, all of which are not encouraging signs about the health of the economy. Not surprisingly, equities sold off in response. The Dow Jones Industrial Average was down in six of the last seven trading sessions, and is flirting with the October, 2022 low.
The economic concerns have hurt the economically cyclical stocks, including those in the industrial, energy, and materials sectors. Conversely, the interest-rate sensitive sectors, including the technology space, have fared relatively better, as the more benign price data and sentiment that the Fed will likely need to reconsider the pace of interest-rate hikes pushed some investors back into growth areas. This is reflected in the disparate performances of the Dow Jones Industrial Average and the technology-heavy NASDAQ Composite over the last bearish week of trading on Wall Street.
There has been a notable move to more defensive-oriented areas. Investors gobbled up gold holdings in recent trading sessions, which has pushed the price of the precious metal above the $1,900-an-ounce mark. The safety of government-backed Treasury securities has also been in demand, with the price of Treasuries rising in response. The recent stock market volatility reinforces our stance that investors should concentrate on the equities of high-quality companies (regardless of the sector) that have shown an ability to deliver steady earnings results and generate positive cash flows in more difficult economic times, while maintaining their dividends. Keeping a significant portion of the portfolio in cash may also prove astute during this period of high uncertainty for both Wall Street and Main Street. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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