The ETF Portfolio Strategist: 19 MAR 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Is the worst of the banking crisis behind us? At least there’s one less problem to worry about after today’s announced UBS takeover of Credit Suisse, or so it appears.
Meanwhile, markets stabilized last week in the US after government and private-sector intervention calmed investors and, for the moment, kept the implosion of Silicon Valley Bank from spreading into a wider crisis.
One proxy for monitoring bank-crisis risk — SPDR S&P Regional Banking ETF (KRE) is still nursing deep wounds, but nearly all of last week’s sharp loss struck on Monday, followed by mostly stable trading near the week’s low in the following days.
The mystery is whether banking’s latest woes will evolve into deeper troubles in the days and weeks ahead. There’s a decent case for cautious optimism, in part because the federal government has, defacto, assured (or at least strongly hinted) that all bank depositors will be made whole if anything else goes bump in the night.
The caveat: key factors that triggered the crisis — higher interest rates and, in some cases, weak balance sheets and dodgy risk management at some banks — are still in play. The week ahead, as a result, may be revealing for deciding if there’s still bigger troubles ahead.
Meanwhile, our strategy benchmarks had a mixed week, which is progress after steep across-the-board losses previously. The G.B16 portfolio ticked lower, trading just below its 200-day moving average. The outlook for all the benchmarks remains bearish, although the US 60/40 mix posted a solid bounce last week. See this summary for design details on the strategy benchmarks listed below.
Bonds are last week’s big winner, thanks large to the revival in the appetite for safe havens. Leading the G.B16 opportunity: government bonds in developed markets ex-US via BWX, which rallied 3.2%. For details on how the metrics in the tables above and below are calculated, see this summary.
US Treasuries (IEF) also rallied, jumping 2.0% on the week. But the Federal Reserve is still expected to lift interest rates at this week’s FOMC meeting on Wed., March 22. The 25-basis-points increase that the crowd’s looking for is down from 50-basis-points, which was the best guess before the banking turmoil hit. The question is whether the Fed will pause rate hikes after the upcoming increase?
Inflation is still well above the Fed’s 2% target and so it’s plausible to argue that the central bank has more work to do to tame pricing pressure. The wild card is how much will softer economic conditions do the Fed’s dirty work from here on out?
The week ahead will drop several clues on how the macro trend outlook. The Chicago Fed National Activity Index will bring a hard-data update on the February profile on Thursday. A more timely, albeit survey-based read is scheduled for Friday, when PMI numbers for March arrive.
More immediately is the issue of how markets react to the UBS takeover of Credit Suisse and the associated implication that the banking crisis has been contained. If we can move through the week without a new round of fallout for bank shares, the relative calm will help inspire the view that we’re moving past recent events. That would hardly be an all-clear signal, but it’d be a start. ■