Fast action by the Treasury Department, the Federal Reserve, and the FDIC prevented a disaster in the financial sector on Monday. The indexes held up extremely well, with the Nasdaq managing a gain of 0.44%, but small caps lagged with a loss of 1.3%. Breadth was around 3,300 gainers to 4,900 decliners due to weakness in small caps and banks, and the number of new lows ballooned to over 850 due to financials.
The financial sector suffered the brunt of the damage, with the Regional Bank ETF (KRE) , getting hit for a 12% loss, with the SPDR Select Financial ETF (XLF) was clipped for a loss of 4%. It could have been much worse, but the move to guarantee all deposits at Silicon Valley Bank (SIVB) and Signature Bank (SBNY) prevented runs at numerous other banks that also have balance sheet and liquidity problems.
It was a choppy session as investors tried to sort out what would occur next. One development that also helped to hold the market steady was that it is now expected that the Fed will be less hawkish. The general consensus is that there will be a quarter-point rate hike at the next meeting on March 22.
But before the Fed makes up its mind, it will have to deal with consumer price index and producer price index. The CPI is due out Tuesday morning and is going to present quite a dilemma for the Fed if it comes in hotter than expected. There is hope that there are some calculation issues that will result in cooler numbers, but this is going to be a very interesting report as it occurs on top of the banking drama.
The potential for more fallout in the banking sector is very high, and there are still substantial unknowns, but the market is hopeful that a friendly Fed will help to offset some of those problems. However, inflation is not finished, and the Fed is not going to destroy its credibility by ignoring it.
If the CPI report comes in softer than anticipated, it will help quite a bit, and we will likely see a very strong positive reaction, but slowing inflation probably means that a recession is coming sooner than many expect.
Be ready for some elevated volatility in the days ahead.
Have a good evening. I'll see you tomorrow.
