Keeping The Current Rally Alive As Investors Seem Confident The Banking Stress Is Over

Market strategists warn that stocks are not guaranteed to sail smoothly for the foreseeable future

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After the sudden collapse of Silicon Valley Bank early in March, the U.S. stock market has flashed an important signal suggesting fears about the banking sector have dissipated after the sudden collapse of the banking sector.

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A gauge of the expected volatility in the S&P 500 index, the Cboe Volatility Index, has fallen for the first time since March 8, when it dropped below the 20 level. Essentially, this is a sign that a lower risk environment has returned. Silicon Valley Bank first announced it had to sell securities in order to strengthen its deteriorating financial situation before it announced the sale.

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This index is often referred to as Wall Street's "fear gauge" because it rose above 30 days ago, the first trading day following the announcement by regulators that emergency measures would be undertaken to stem fallout from Silicon Valley Bank's failure. On Friday, the index was down 1.7% at 18,70 after rising above 30 days ago.

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AllianzIM's head ETF market strategist, Johan Grahn, said, "It doesn't seem to be a normal volatility environment right now." It has been over 95% of trading days in the past 12 months where we were above 20, whereas we were only above 20 15% of the time during the eight-year period before we began experiencing pandemic-driven volatility.

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Furthermore, he noted that over the last 12 months, the VIX topped 30 on the average one in five days, compared with only one in 100 days in the eight years before the pandemic over the same period of time.

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As Grahn said in a statement, we are living in what we view as normal times at the moment, however such times have never existed in the past.

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Investors should also be aware that there will be more instability to come from other analysts in the future.

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It could be an indication of a sagging economy if interest rates are cut in 2023

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S&P 500, Dow Jones Industrial Average, and the S&P 500 all ended the month on a positive note with a 3.5% gain, according to Dow Jones Market Data, which reflects the positive performance of the three major U.S. stock indexes. Despite a surge in volatility in banking stocks, the Nasdaq Composite climbed 6.7% as a rush to the tech sector resulted in the market rising 6.7%.

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During the first three months of 2023, both the S&P 500 and the Dow gained 7% each, according to Dow Jones Market Data. In the first quarter, the Nasdaq Composite also gained 16.8%, its best quarterly gain since at least the fourth quarter of 2020.

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In a phone interview with MarketWatch, Grahn told MarketWatch that those worst fears have been put to rest, at least for the time being. I think the markets are just reflecting that fact right now, and that's as it should be,” he said.

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He explained that "the Federal Reserve Chairman Jerome Powell made a move to flex his dovish wings a little bit by taking the banking issues into consideration. As a result, the market now believes it is possible that he will pull back from the more aggressive rate increases previously communicated," he said.

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There has been a reprice of expectations on future monetary tightening by the Federal Reserve as a result of stress in the banking sector and a possible credit squeeze. According to the CME FedWatch tool, a 25 basis-point increase is expected by 49% of traders in May, with the odds of a pause being placed on interest rate increases.

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There is still a possibility that the economy could tank as soon as spring arrives "very soon" and in a "very painful manner" if investors expect another rate cut in the coming weeks, Grahn believes.

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Grahn said investors are effectively saying that there would be such a great deal of pain in the system that the Fed could not possibly offer an argument that defended keeping interest rates high, which could hardly be made in the Fed's favor. As the Fed tells the market that rate hikes will be there, the market's risk sensitivity in comparison with what the market is priced in terms of rate increases is way too wide. There is no way that the market will be right unless we have a disastrous couple of months ahead of us.

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Here are five reasons why we are going to have another bad year for the bears in 2023. Let's look at them one by one

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Spigot for liquidity has been reconnected

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The CEO of Waddell & Associates, David Waddell, said that past bailout reassurances at Waddell & Associates have been instrumental in stabilizing the financial markets, since they neutralized the threat of banking stress in the aftermath of the bailouts.

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A few weeks ago, the Fed began releasing liquidity into the market and softened its rhetoric, and the market took off again; this is because bailouts create even more capital for investors, while crises rob them of their savings, according to Waddell.

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In that regard, Waddell said that his report offers further support for the notion that there will be a shallow recession, since the Fed has shown a tendency to overtreat the economy. "The patient's going to be fine," he said.

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The U.S. Treasury Secretary Janet Yellen, who announced earlier this month that Silicon Valley Bank had gone bankrupt, ruled out that broad-scale federal bailouts would be required. She stressed that the situation was radically different from what happened during the 2008 financial crisis, when unprecedented measures were taken to save the nation's biggest banks.

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There have been some big moves in the Treasury market

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There was a large decline in the yields on U.S. Treasury bonds in March, with the yields on the two-year Treasury bonds posting their biggest monthly decline since January 2008 due to the drop in interest rates. A report released by Dow Jones Market Data showed a yield on the two-year Treasury bond selling at 4.06% on Friday, down 73.5 basis points from February.

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According to Liz Young, head of investment strategy at SoFi, there hasn't been any material change in the economic data, and that is sufficient indicator that equities are holding up and the economy is performing well, however, movements of this magnitude are not usually a sign of smooth sailing ahead.

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According to Trade Algo data, in mid-March, the ICE BofA MOVE Index, which indicates the implied volatility of the U.S. Treasury market, reached 198.71, its highest level since 2008, according to company data from ICE BofA.

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There is no question that the recent fears in the banking sector are causing a growing sense of uncertainty around Fed policy; however, the uncertainty may also be caused by an uncertain end to the Fed's hiking cycle, which has not yet been fully clarified."

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March jobs data, earnings reports

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As a result, Waddell warned investors not to rely too heavily upon the gains in U.S. stocks during the past few weeks, but he was hopeful that market sentiment would improve in April as earnings seemed to be resilient and robust during the recovery.

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As a result of continuing concerns in the market about bank liquidity as well as the possibility of a broader economic recession, the senior earnings analyst at Trade Algo stated that EPS estimates for S&P 500 companies for the first quarter of 2023 have been cut more than average, according to Butters, a senior earnings analyst at Trade Algo.

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Butters noted in an email that when the index declines by the estimated 6.6% it would represent the largest drop in earnings since the second quarter of 2020, if the actual decline is what it is expected to be, according to Butters.

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In addition to several Fed speakers scheduled for next week, the U.S. Labor Department will publish its monthly report on Friday about the labor market conditions in March, which will provide a good indication of the economy's health.

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