Equities fell slightly across the board last Friday with all three major indexes sporting minor losses by the end of the day. Breadth remains lousy, with the major indexes held aloft by the largest market cap companies such as Apple (AAPL) . The tech giant is up 38% on the year and trades at nearly 30x earnings even though projections are calling for earnings to be down slightly and for sales growth to be negative for fiscal 2023.
I am finding it hard to find much value in the current market with the S&P 500 trading at roughly 18x earnings. Yes, we are seeing inflation levels drop some, but there are few growth drivers right now. The yield curve remains deeply inverted and money supply is shrinking at the fastest rate since the Great Depression.
I also think investors are way too cavalier about risks to the credit markets after we have seen the second-, third- and fourth-largest bank failures in U.S. history over the past two months. Banks with more than $500 billion in deposits were pushed into Federal Deposit Insurance Corporation (FDIC) receivership with their remains sold off to larger players such as JPMorgan Chase (JPM) . That is a larger degree of bank failures by deposits than occurred during the Great Recession.
Several regional banks remain under considerable pressure and names such as PacWest Bancorp (PACW) have seen their stock prices implode since the problems at Silicon Valley Bank first emerged. Fortunately, only a quarter of Pacwest's deposits are uninsured. However, it feels like it could be a zombie bank at this point.
One thing that seems obvious is that the whole regional bank system has little choice but to tighten up credit criteria. And tighter credit doesn't bode well for the commercial real estate sector, which relies on this part of the financial system for about 70% of its borrowings. This is especially true when parts of the commercial real estate space (e.g., office buildings in New York City, Chicago and San Francisco) seem on the verge of an existential crisis.
The commercial real estate sector shouldn't hope that the insurance industry will pick up the lending slack. According to a recent Federal Reserve stability report, the insurance industry held $2.25 trillion of assets deemed to be risky and/or illiquid at the end of 2021. These assets included commercial real estate or corporate loans.
Insurance companies don't face the same dilemma as regional banks with the low-yield, long-duration bonds in their portfolios as funds from insurance policies are stickier than bank deposits that can be moved via smartphone in the blink of an eye. There will be no "bank runs" at insurance companies. However, the industry is also likely to loan less and implement more stringent credit criteria going forward.
The combination of little to no earnings growth, a deeply inverted yield curve and some sort of credit crunch likely on the horizon makes the old market adage "sell in May and go away" rarely more applicable in my view.
