2023-03-15 11:57:28 ET
Summary
- February PPI came in well short of expectations, which is good news.
- The market seems too focused on the Banks.
- I fully expect a ferocious rally if The Fed calms the market on Banks and rates.
- Panic is not a strategy.
Misery loves company. COVID, China, Russia-Ukraine, inflation, the Fed, Chairman Powell making an appearance, and more recently, banks have all taken their turn over the last three years to make the market jittery, to put it mildly. Even during the wild 2022 days, the Dow Jones Industrial Average (DJI) was a (relative) picture of sanity with its collection of "safe" names. 2023 has challenged that narrative emphatically with first the consumer names and, most recently, banks, worrying investors.
It is alright to worry, but not to the extent of burying our heads under the sand, choosing not to see or listen to the good news that maybe walking by us. More to the point, February's Producer Price Index ("PPI") came in well below expectations, as Seeking Alpha has covered here . Now, pre-SVB Financial Group (SIVB), this news would likely have sent the market sharply higher. But as of this writing, the market on average is down about 1.50%, erasing yesterday's rally.
Despite the U.S government's assurance that depositors at even the now-fallen SVB are protected, the market is turning deaf ears, as each headline about a struggling bank, big or small, strong or weak, is triggering a selloff. The Credit Suisse Group AG ( CS ) plunge is today's attention-grabbing headline (based on market reaction), while the fact that The Charles Schwab Corporation ( SCHW ) lost nearly 50% of its value from 52-week high is not getting enough attention. At least the CEO knows things aren't as bad and put his money where his mouth is.
Turning our attention back to PPI, the chart below reminds me of the days when I was actively tracking COVID cases back in 2020/21. This is a picture-perfect chart, where there is a clear ramp-up, peak, and a gradual decline. Now, there have been and still will be a few months that buck the trend with a small percentage, but the overall trend being downwards is undeniable.
PPI (numbernomics.com)
With the last couple of inflation reports coming out positively and being well aware of the banking "crisis," I expect the Fed to be more dovish than many predicted a week ago. But then, I almost expect the market to start worrying about a recession, which until it is announced will be the good news the market was waiting for. Lastly, the below wonderful comment from Seeking Alpha user "Lake OZ boater" hits the nail on the head. While everyone (including me) has been accusing the Fed of not having a clue, we fail(ed) to realize that monetary policies take time to show up in official numbers. Or, as eloquently put forward by this user, you cannot expect a needle's precision when a hammer is used to solve the problem.
What do all these mean for investors? In two words, don't panic. In many words, use general market pullbacks and irrational selling in individual sectors/stocks to your advantage. I strongly believe this is a case of the Goliaths winning over the Davids in the banking world. While regional players may be under pressure, the large national players have been under such scrutiny since 2008 that I don't expect them to forget their lessons so easily.
Wells Fargo & Company ( WFC ) is a good example of a company that is not in a crisis on its own, but it's stock been unfairly punished because it is a bank. Someone should file a prejudice and discrimination suit against the market. Wells Fargo had enough confidence to increase its dividend in 2022 and has among the lowest percentages among large banks when it comes to uninsured deposit accounts. For these and other reasons, I recently added to my Wells Fargo position in the $38 region, which suddenly presents a nice 3% yield.
In times like this, many babies get thrown out with the bath water and many deals go unnoticed due to the general panic and the red price tags we see on our screens. Many small to mid-sized technology stocks have been punished further due to potential exposure to SVB and similar banks. Now, all those stocks deserved their shellacking in 2022 after flying into undeserve heights in 2020 and 2021. But to punish them for small or speculated exposures to banks is a bit much. Even among companies with direct exposure to SVB, some selloffs stand out. Roku, Inc. ( ROKU ) has many problems as it continues expanding on its growth strategy and the fact that 26% of its cash was at SVB, but that should mean little in the long-term if you like the company's streaming growth and valuation here.
I am beginning to believe that the last couple of years have taught us to be more negative than the reality may demand. While I truly believe in and follow being safer than sorry, an overly negative sentiment leads you to see only what you want to see and not all there is to see. And that can be costly in the long run. I fully expect a ferocious rally at the slightest hint that The Fed is happy with the inflation direction and/or is further ready to appease depositors.
If you have not had enough of the cliches, I will conclude with one more: panic is not a strategy.
For further details see:
February Producer Price Index: Good News, Ignored