SSPY - If Bank Stocks Can Rally The Market Can Rally Some More
2023-05-09 01:45:00 ET
Summary
- The latest rake hike from the Federal Reserve is behind us, and we are left to wonder if Jerome Powell overdid it yet again, this time on the tightening side.
- Powell’s Federal Reserve overstimulates to the upside and then overtightens to the downside.
- Why would regional banks stage a relief rally? Because the Fed is done raising rates, in my opinion.
The latest rake hike from the Federal Reserve is behind us, and we are left to wonder if Jerome Powell overdid it yet again, this time on the tightening side. Powell’s Federal Reserve overstimulates to the upside and then overtightens to the downside.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Three regional banks of significant size have now failed, with a complete wipeout for their shareholders and bondholders – namely, Silicon Valley, First Republic (FRCB), and Signature Bank ( SBNY ) – hence the horrific share price performance in the regional banking sector.
Now, try explaining to bank stock investors that these three situations were highly idiosyncratic and that other banks are organized in a more orthodox fashion!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Why would regional banks stage a relief rally? Because the Fed is done raising rates, in my opinion.
As the first chart (above) shows, M2 Money Supply is melting like spring snow, declining by 5.1% on a year-over-year basis. M2 has been shrinking since December 2022, which has never happened before, ever since data became available in 1959.
Before the creation of the Federal Reserve in 1913, the M2 equivalent used to shrink on a regular basis as money supply was more erratic, but we have no good data other than the highly erratic inflation rates in the 1700s and 1800s, which suggests that was the case.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Generally, in a new bull market, market breadth is very strong, as small- and mid-caps tend to lead the way. However, the breadth in this rally has been very narrow as 90% of the gains in the S&P 500 have been attributed to about 20 stocks. For instance, when Apple reported good earnings, which investors like to see – as it did last week – then the whole market rallies.
The only other new bull with narrow breadth in recent history is when the market started to rally in late March and April 2020.
Breadth was very poor, and it looked more or less like it does today, but the rally in 2020 was a function of extreme deficit spending and quantitative easing, which resulted in the inflation problem that we had in 2021 and 2022, while now we have quantitative tightening at a rate we have never seen before, as well as pressure on the White House to curb deficit spending.
U.S. Government Deficit as Percentage of GDP, 1998-2022
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
“Tax and spend” is no way to fix our deficit, but, in reality, both political parties have blown out the deficit in the last 50 years, for different reasons each time. Every administration has a convenient excuse to spend, at the time. That said, we have seen deficit spending in Washington every year since 2001. So, whoever figures out how to stop over-spending and streamline the whole government has my support.
Navellier & Associates Inc. owns Apple Inc. ((AAPL)), in managed accounts. Ivan Martchev does not personally own Apple Inc. ((AAPL)).
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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If Bank Stocks Can Rally, The Market Can Rally Some More