Concerns about a run on another bank are subsiding, but the debate over the economic fallout of the banking crisis is building. The market is struggling to measure how the Fed will balance the fight against inflation with the potential for economic slowing due to issues with banks.
Prior to the bank crisis, the market focus was on interest rates going higher for longer, but now the primary concern is on economic slowing leading to a potential recession. A number of high-profile strategists, such as "Bond King" Jeffrey Gundlach and Morgan Stanley's (MS) Mike Wilson, are convinced that the economy is on the brink of tipping into a recession, but the market is failing to reflect that danger so far.
Fed Fund futures indicate a high level of uncertainty about what the Fed will do next. Last week the market wasn't expecting any rate hike at all at the next Fed meeting on May 3, but as of Tuesday morning, a 50/50 chance of a 0.25% increase is indicated. If there is a hike, then there is a 50/50 chance it will be reversed at the next meeting on June 14, according to Fed Fund futures.
The strongest headwind the market faces right now is that there isn't clarity as to how much the Fed will focus on fighting inflation rather than trying to avoid a recession. There is a very important inflation report on Friday that is going to influence what the Fed does next, but it is going to take time to see how the banking crisis is affecting economic growth and whether employment is finally starting to cool.
Overall, price action remains positive, but the relative strength of large-cap technology stocks finally reversed. The (QQQ) lagged on Monday with a loss of 0.7%, while small-caps (IWM) outperformed with a gain of 1.1%. Lately, there has been quite a bit of rotational action, but it has been inconsistent. Big-cap technology felt like a safe haven for a while, but names such as Nvidia (NVDA) and Apple (AAPL) are showing early weakness on Tuesday morning.
It is a very tricky market environment right now with both rotational action and a trading range. The bulls and bears are fighting back and forth over economic issues, but the bulls have had some liquidity while the bears are focused on the fallout of the banking crisis.
At this point, the best course of action is to stay patient and see how conditions develop. The positive price action is starting to slow, but the economic bears have still had little success pressing their negative narratives.
We have a flattish start on Tuesday, but the consumer confidence report at 10 a.m. ET may cause some movement.
