Stocks are indicated higher here on Monday morning as First Citizens BancShares (FCNCA) is buying large pieces of the defunct Silicon Valley Bank. In addition, Treasury Secretary Janet Yellen and other regulators continue to send the message that the overall financial system is sound despite some banks suffering stress.
Over the last two weeks there has been a dramatic shift in the market as the primary economic concern has shifted from higher interest rates for longer to the banking crisis. The market appears to be more relieved that the Fed is less hawkish than it is worried about how a banking crisis will impact the economy.
The odds of a recession have increased but the market is not reacting to that concern at this time, at least as far as big-caps and the indexes are concerned. The market action has been misleading because of the outperformance by big-caps.
The indexes are cap-weighted, which means a few larger stocks dominate how the indexes move. According to Liz Ann Sonders of Charles Schwab, the S&P 500 Index outperformed an equal-weighted version by 5.3% in March. The only other time this has occurred was in March and June 2000.
Another way to see the two-tiered nature of the market action is that the Russell 2000 is lagging the Nasdaq 100 and S&P 500 by the greatest amount since 2000. The Nasdaq 100 has had its best quarter relative to the S&P 500 since early 2009.
There are quite a few other stats that show how the S&P 500 and Nasdaq 100 are not accurately reflecting the action in the broad market, but the strength in those indexes is helping to drive sentiment, and that is keeping folks from embracing the bearish narrative.
This week there are a number of events that will cause reflection on whether the market is correctly discounting the economic issues that lie ahead. There are several Fed members speaking, and on Friday is the Fed's favorite measure of inflation -- Personal Consumption Expenditures, or PCE.
The Fed has been quite clear in its comments that the fight against inflation is not over, and Fed Chairman Jerome Powell and others have commented that they don't see any interest rate cuts this year. The market doesn't believe them and expects the banking crisis will stop any more hikes and produce a number of cuts. The thinking is that the Fed is misstating its intentions because it is afraid the market may overact and cause more inflationary pressure.
It is an extremely odd market environment with confident bulls fighting the Fed and chasing big-caps higher while small-caps, financials and other sectors see their worst relative performance in decades. The economic bears are growling loudly about the chances of a recession and extended valuation, but the big-cap bulls are focused on price action and are not ready to back down.
The billion-dollar question is, "How does this resolve?" We don't know at this point, but we will need to stay highly vigilant and be ready to move quickly.