Stocks and bonds were bouncing around in a wide range on Wednesday afternoon as they digested key policy comments from Fed Chair Jerome Powell. It looked like the indexes were going to end up close to flat with small losses, but then that changed.
Headlines hit during Powell's press conference that Treasury Secretary Janet Yellen had commented that there were no current plans to increase the level of insurance for bank deposits. The financial sector immediately sold off on the Yellen comments, and it spilled over to the broader market, which was confused about whether the reaction had something to do with Powell.
At the end of the day, the dismal Regional Banking Sector (KRE) had suffered a loss of 5.7%. And it is not seeing any significant rebound so far Thursday morning.
Overall, Powell did a fairly good job of finding a balance between a policy that will prevent further problems in the banking sector but will still deal with the issue of inflation. He made some comments that the market did not like, such as how the fight against inflation is far from over and that members did not predict any rate cuts in 2023. He also indicated that the banking crisis has done the Fed's job to some degree and that the central bank will not need to be as aggressive with monetary policy.
The most important parts of Powell's comments are what he left inside. He hinted that the risk of a recession has increased and that the banking crisis has made the potential for a soft economic landing more difficult. The market believes that the Fed will cut rates several times later this year, but the only way that will occur is if there is some significant economic slowing that drives down inflationary pressures.
The primary bearish narrative in 2023 has been that the market has not priced in a recession. Valuations and earnings estimates are still too high. The bulls have done a nice job of battling this thesis by staying focused on cooling inflation.
There has been a high level of liquidity that is partially a function of the bank rescue that has given the bulls the power to drive the price action and ignore the economic bears. The real question is to what degree liquidity can continue to override the obvious economic issues that have greatly intensified due to the banking crisis.
Stocks are indicated slightly higher Thursday morning, and we will see if the price-action bulls can manage a quick bounce after Wednesday's selloff. While the S&P 500 is sitting at 200-day moving average support, other areas of the market, such as banks, small-caps, and biotechnology, are in very poor shape and struggling to hold recent lows.
There has been a strong rotation into some big-cap technology names that are viewed as a safe haven. We will have to see if that resumes as investors look for a place to put cash.
The Fed and Janet Yellen were not market friendly and have given the economic bears more ammunition, but the price-action bulls are surprisingly strong, and it may be too early to count them out.