The indexes recovered some of their losses in the afternoon, but it was a poor day that caught some investors by surprise. Breadth was very poor at around three-to-one negative, and new 12-month lows spiked up to over 550 names. There was some strength in drug names that are viewed as safe havens, but it was a sea of red otherwise.
There were two issues impacting the action. The first was a weaker-than-expected JOLTS jobs openings report, which showed that job openings are declining and the number of layoffs is increasing.
The second issue was continued pressure that pushed regional banks to fresh lows. The regional bank exchange-traded fund (KRE) tracks 144 small banks, and not one of them had a gain Tuesday. KRE was down over 6% and is at its lowest point since October 2020.
This poor action indicates that the bank woes are not fully resolved, and there are likely to be some more failures when the full extent of unrecognized losses on balance sheets are identified. The rapid Fed interest rate hikes have been very painful for these small banks that didn't see it coming, and they are sitting on an aggregate of about $700 billion in unrealized losses.
The bank problems and slowing demand for labor emboldened the economic bears that believe the market has not yet priced in the economic difficulties that lie ahead. The bulls are still focused on good price action in some big caps, slowing inflation, and hopes for a soft economic landing, but we will find out tomorrow if the Fed will give them some ammunition.
Although the Fed has been quite clear that it does not expect to cut rates at all in 2023, the market has been optimistic and is anticipating a more dovish posture down the road. Fed Chair Jerome Powell will influence the market narrative Wednesday with comments at the press conference following the Federal Open Market Committee decision.
We have a very intense economic battle right now, and all news is being viewed in that context. Fed decision is going to be particularly interesting as it will highlight whether the main issue now is slowing growth rather than inflation.
Have a good evening. I'll see you tomorrow.
