On a morning that is very quiet on both the economic and earnings fronts, the equity futures have been quite volatile as investors review the flow of banking news. The contracts for Dow, NASDAQ, and S&P 500 futures were down sharply earlier on news about the ongoing banking crisis. Specifically, reports surfaced over the weekend that embattled bank Credit Suisse (CS) has agreed to be acquired by banking giant UBS Group AG (UBS) in a deal valued at $3.2 billion. That deal comes after Credit Suisse wrote down $17 billion of bonds on its balance sheet to zero. The value of the pending deal also is at a fraction of the bank’s market cap on Friday (over $8 billion), as UBS will assume $5.4 billion in CS losses and requires the backing of a $108 billion loan from the Swiss National Bank to avoid a liquidity crunch and keep the financial pain from spreading to other financial institutions. As more details of the UBS deal have emerged, the futures rallied, but the gyrations this morning suggest the upcoming trading session will likely be another volatile affair for Wall Street.
This week, all eyes will be on the Federal Reserve, which begins its two-day monetary policy meeting tomorrow. The Federal Open Market Committee meeting may be the most anticipated confab in years because it comes as the central bank is fighting inflation, while trying to stave off an emerging banking industry crisis. The latter came into focus after a liquidity crunch at specialty lenders Silicon Valley Bank and Signature Bank forced federal regulators to step in and take control of those institutions and guarantee otherwise-uninsured deposits.
These events have brought talks of contagion and have rattled the stock and bond markets over the last fortnight. The recent Credit Suisse news and reports that the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank have agreed to a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements did nothing to quell the escalating concerns about the global banking industry.
There is a growing sense among market watchers that the U.S. central bank may pause this month on the interest-rate hiking front, in a hope that such a move may help settle down a struggling banking sector where higher borrowing costs have put stress on the financial system. The case for the Federal Reserve leaving the federal-funds rate unchanged has garnered some support recently and was helped by some benign readings on producer and consumer prices, which suggest the most restrictive monetary policy course in four decades is starting to tame inflation. However, prices are still well above the Fed’s target of 2%, so an interest-rate hike on Wednesday of a quarter-point is still the consensus expectation; the Federal Reserve will issue its monetary policy statement at 2:00 P.M. (EDT) on March 22. This event could cause volatility to take another leg up if the Fed moves more aggressively than market pundits are anticipating.
The aforementioned banking troubles—and the belief that it could lead to a hard landing for the economy in coming months—are pressuring the global stock and bond markets. On these shores, the major equity averages fell anew on Friday, with the move down led by the small-cap Russell 2000. This is notable as the small-cap stocks often lead the direction of trading. If nothing else, we expect the next two-and-a-half trading sessions leading into the Fed’s monetary policy decision to prove volatile.
So what is an investor to do right now? We have not changed our stance that investors should exercise caution. This was reinforced by the latest selloff on the banking turmoil. We recommend keeping the majority of one’s portfolio in high-quality companies and cash, while adding some shorter-duration bond exposure. This would include stocks of entities that have historically demonstrated an ability to generate steady earnings and cash flow results even during the most difficult economic times, while maintaining their dividend payments. The continued inversion of the Treasury market yield curve, shrinking money supply, and falling oil prices on global demand concerns all suggest some economic pain lies ahead.
From a stock picking standpoint, we would also concentrate more on high-quality names than to focus on one particular sector. Historically, stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line have relatively outperformed the broader market during turbulent times for the stock and bond markets.
The economically sensitive energy and financial (banking) stocks have done poorly in recent weeks and should be avoided by conservative investors, given the recent banking troubles and intensifying economic concerns. Conversely, the higher-growth equities have performed relatively better of late helped by some growing sentiment that the Federal Reserve may slow or even pause its interest-rate hikes to help settle down a shaky U.S. banking system. The higher-growth stocks, such as the technology names, also are more appealing, especially for those with a longer-term investment horizon, when worries about the economy increase.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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