Investors certainly have had worries piled on top of themselves so far in March. The collapse of Silicon Valley Bank (SIVB) , quickly followed by Signature Bank (SBNY) into FDIC receivership rattled investors faith in the regional banking system. Steps taken by the FDIC and Treasury Department as well as the shotgun marriage of UBS Group (UBS) and Credit Suisse (CS) appear to have stabilized things for the moment.
Whether authorities have achieved a long-term fix to the recent turmoil in the banking system or March travails are just the tip of the iceberg is the $64,000 question for investors.
Another increasing concern I have for equities is we are likely to see an "earnings recession", especially in cyclical industries. That's one I don't think is priced into the market at these levels.
Let's take airlines. Earlier this week Bank of America reported that based on credit card data, bookings fell 3% in the week ending March 19th compared to the same week in the pre-pandemic year of 2019. They had also fallen 1.2% the week before. One has to wonder if the burst of travel demand airlines saw from consumers coming out of lockdowns loaded with stimulus funds has finally run its course.
I would also be very wary about the outlook for the demand for business travel across the industry. We have seen a surge of layoff notices in 2023, including over the past week from Disney (DIS) and Amazon (AMZN) . I spent two decades at American Express (AXP) , and I can tell you from experience that one of the first expense items that gets cut in any sort of downturn or belt tightening is corporate travel. Given what a huge profit center business travel is for the industry, this is likely to impact earnings projections for most airlines in the quarters ahead.
I will admit I am surprised about how well the homebuilder stocks have held up for the most part given the average mortgage rate has more than doubled since the beginning of 2022, negatively impacting housing demand. Robert W. Baird I think had a good call earlier this week in downgrading both Caterpillar (CAT) and United Rentals (URI) . The analyst there noted that the regional banking system supplies some 70% of lending to the commercial real estate market, which is already facing the prospects of rising defaults.
It is hard to see how this doesn't affect the pace of commercial real estate construction going forward. Combined with the slowdown in residential construction, names like CAT and URI will face a hostile demand environment for the rest of 2023, at least, one would think.
My portfolio is very underweight all the cyclical sectors of the market for some of the reasons outlined above as well as my continued view that the country will be in a recession within the next 12 months. The one exception to that is energy, as I believe the underinvestment across the industry over most of the last decade will put a higher 'floor' in for oil prices and I like the longer term prospects for names with proven reserves because of that.
(AMZN and URI are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
