For a while, the most likely outcome for stock markets in 2023 was range trading. Far worse scenarios are now on the table.
Over the past week, the Dow Jones Industrial Average is up 376 points, or 1.2%
S&P 500 index
ended up down 1.4% and the
Nasdaq Composite
increased by 1.7%. All three fell about 1% after the US Federal Reserve hiked interest rates by a quarter point on Wednesday.
The market’s nowhere action over the past few days – despite some notable events, such as Fed speeches and Credit Suisse Group (Ticker: CS) agreeing to be taken over by rival UBS Group (UBS) – is emblematic of the recent one Trade . The S&P has rallied between 3700 and 4200 for the past few months.
Investors just can’t get excited about stocks when the economy is slowing, interest rates are rising, inflation is lingering, and earnings estimates are falling. All of this, combined with a series of crises — the bursting of the crypto bubble and recent regional bank collapses — has prevented big gains, says Chris Senyek, chief investment strategist at Wolfe Research.
Even if investors could be motivated by a slowdown in inflation and a possible end to the Fed’s rate-hiking cycle, other potential crises loom. On Senyek’s watch list are commercial real estate and private equity, both leveraged bets in a rising interest rate environment. “We’re in a range at best, bottoming out at worst,” he says.
The current crisis will not go away either. It won’t reach the levels of 2008 and 2009, when banks exploded because they were overleveraged and owned too many esoteric — and toxic — financial products. But the current problems may still remain. “Debt and liquidity crises don’t end in two weeks,” said Que Nguyen, Research Affiliates, chief investment officer for equities. “It’s really a crisis that the Fed made.”
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How come? Short-term rates are now higher than long-term rates, which is a disaster for smaller banks that borrow at short-term rates and earn yields further out on the yield curve, said Barry Knapp, founder of Ironsides Macroeconomics. Of course, they could have used interest rate swaps and other “maturity transformation” methods, but that’s a little too mysterious for some US banks. “They’re just small land banks,” says Knapp, who also fears the stock market could be headed for a crash. “You’re not going to have a big interest rate swap book.”
Brian Rauscher, head of global portfolio strategy at Fundstrat, isn’t worried about the bottom being reached, but he’s not excited about the stock market either. “It was a bunch of individual cockroaches,” he says of the current problems. However, none of these are end-of-the-world bearish.
So the mood is grim, and four strategists are offering similar advice: stay on the defensive. Have some extra cash ready. Stick to quality stocks — those with solid balance sheets and growth that doesn’t depend on the broader economy. Small-cap stocks are cheaper than usual after falling 18% over the past 12 months, but investors should avoid small-cap bank stocks. Above all, don’t get too excited for the next Wall Street rally.
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Stocks “can go sideways for a long time,” says Rauscher. “Walk sideways, go down – the only thing I didn’t mention was to go up.” Neither should he.
write to Al Root at [email protected]
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