Market Snapshot
briefing.com
| Dow | 32053.12 | +23.10 | (0.07%) | | Nasdaq | 11763.64 | +93.69 | (0.80%) | | SP 500 | 3947.49 | +9.25 | (0.23%) | | 10-yr Note | +3/32 | 3.41 |
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| | NYSE | Adv 999 | Dec 1831 | Vol 1.0 bln | | Nasdaq | Adv 2071 | Dec 2342 | Vol 4.8 bln |
Industry Watch
| Strong: Communication Services, Information Technology |
| | Weak: Energy, Utilities, Financials, Real Estate, Consumer Staples |
Moving the Market
-- Continuing to digest the Fed's rate hike and Powell's commentary
-- Strong upside leadership from some of the mega caps
-- Reacting to more central bank rate hikes from the likes of the Bank of England, Swiss National Bank, Norges Bank
-- Falling Treasury yields
-- S&P 500 running into resistance at the 4,000 level
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Closing Summary
23-Mar-23 16:30 ET
Dow +75.14 at 32105.16, Nasdaq +117.44 at 11787.39, S&P +11.75 at 3949.99
[BRIEFING.COM] The stock market started the session on a decidedly upbeat note, attempting to recover some of the sharp declines registered yesterday. The upside momentum started to dissipated, though, after the S&P 500 briefly tipped above the 4,000 level at its high for the day.
Still, the main indices remained in positive territory until an uptick in selling interest without an obvious catalyst dragged the market into negative territory in the late afternoon. Ultimately, the main indices closed in the green, but well off their highs for day, thanks to notable strength in some heavily-weighted components.
Investors were still digesting the Fed's latest rate hike and commentary from Fed Chair Powell today along with rate hikes from central banks overseas.
Briefly, the Bank of England announced a 25-bps rate hike and hinted at more increases in the future while central banks from Switzerland, Norway, Hong Kong, and Philippines also hiked their policy rates. The Swiss National Bank also said the country's bank crisis is over.
Initially, buying interest was broad in nature with mega cap stocks in a leadership position. By the close, most mega cap stocks maintained a leadership position while the broader market deteriorated. The Vanguard Mega Cap Growth ETF (MGK) was up 1.1% versus a 0.3% decline in the Invesco S&P 500 Equal Weight ETF (RSP).
Strikingly, consumer-oriented Tesla (TSLA 192.22, +1.07, +0.6%) and Amazon.com (AMZN 98.71, +0.01, +0.01%) were exceptions in regards to mega cap leadership, having fallen into negative territory around the same time that the main indices fell below their flat lines.
Bank stocks again fell under notable pressure as the market deteriorated. The SPDR Bank ETF (KBE) declined 2.5% and the SPDR Regional Bank ETF (KRE) fell 2.8%.
Only two of the S&P 500 sectors were able to close with a gain -- information technology (+1.7%) and communication services (+1.8%) -- while the energy (-1.4%), utilities (-1.0%), and financials (-0.7%) fell to the bottom of the pack.
The 2-yr note yield fell 11 basis points today to 3.78% and the 10-yr note yield fell nine basis points to 3.41%.
- Nasdaq Composite: +12.6% YTD
- S&P 500: +2.8% YTD
- S&P Midcap 400: -1.8% YTD
- Russell 2000: -2.3% YTD
- Dow Jones Industrial Average: -3.1% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending March 18 decreased by 1,000 to 191,000 (Briefing.com consensus 204,000) while continuing jobless claims for the week ending March 11 increased by 14,000 to 1.694 million from last week's revised level of 1.680 million (from 1.684 million).
- The key takeaway from the report is that initial claims remain at a low level, pointing to little recent change in the health of the labor market.
- Q4 current account balance rose to -$206.8 billion from a revised -$219 billion (from -$217.1 billion).
- New home sales increased 1.1% month-over-month in February to a seasonally adjusted annual rate of 640,000 units (Briefing.com consensus 650,000) from a downwardly revised 633,000 (from 670,000) in January. On a year-over-year basis, new home sales were down 19.0%.
- The key takeaway from the report is that sales activity edged up for the fourth time in the past five months, though the February increase was assisted by a downward revision to the sales total from January.
- Weekly EIA Natural Gas Inventories showed a draw of 72 bcf versus a draw of 58 bcf last week.
Market participants will receive the following economic data on Friday:
- 8:30 ET: February Durable Orders (Briefing.com consensus 1.6%; prior -4.5%) and Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.7%)
- 9:45 ET: Preliminary March IHS Markit Manufacturing PMI (prior 47.3) and preliminary March IHS Markit Services PMI (prior 50.6)
Market remains near lows of the day
23-Mar-23 15:30 ET
Dow -94.15 at 31935.87, Nasdaq +50.42 at 11720.37, S&P -7.60 at 3930.64
[BRIEFING.COM] The main indices remain near their worst levels of the day ahead of the close.
The 2-yr note yield fell 11 basis points today to 3.78% and the 10-yr note yield fell nine basis points to 3.41%.
Market participants will receive the following economic data on Friday:
- 8:30 ET: February Durable Orders (Briefing.com consensus 1.6%; prior -4.5%) and Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.7%)
- 9:45 ET: Preliminary March IHS Markit Manufacturing PMI (prior 47.3) and preliminary March IHS Markit Services PMI (prior 50.6)
Market sinks, then pops back to positive territory
23-Mar-23 15:05 ET
Dow +23.10 at 32053.12, Nasdaq +93.69 at 11763.64, S&P +9.25 at 3947.49
[BRIEFING.COM] The steady sell off continued in the last half hour before the main indices took a sharp turn higher, reclaiming a positive position.
Market internals reflect the negative bias that has driven the market lower. Decliners lead advancers by a nearly 2-to-1 margin at the NYSE and a 4-to-3 margin at the Nasdaq.
Energy complex futures settled the session with losses. WTI crude oil futures fell 1.6% to $69.69/bbl and natural gas futures fell 2.9% to $2.27/mmbtu.
Regeneron gains after asthma drug trial data impresses, Comerica dips on financial stock weakness
23-Mar-23 14:30 ET
Dow +54.51 at 32084.53, Nasdaq +108.29 at 11778.24, S&P +14.86 at 3953.10
[BRIEFING.COM] The S&P 500 (+0.38%) is now at session lows, up just shy of 15 points.
S&P 500 constituents Regeneron Pharma (REGN 797.31, +46.01, +6.12%), Micron (MU 60.78, +2.61, +4.49%), and Match Group (MTCH 40.19, +0.97, +2.47%) are among today's top performers. REGN caught an upgrade to Mkt Perform at Raymond James this morning following asthma treatment trial results for DUPIXENT (Dupilumab), while MU and MTCH appear to be stronger on general strength in tech stocks.
Meanwhile, Comerica (CMA 40.08, -4.44, -9.97%) is at the bottom of the S&P, general weakness in financials weighing on the stock while a target cut at Truist also applies pressure.
Gold shoots higher after Fed signals one more hike on tap this year
23-Mar-23 14:00 ET
Dow +147.23 at 32177.25, Nasdaq +158.81 at 11828.76, S&P +26.89 at 3965.13
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+1.36%) stands atop the major averages, up more than 150 points.
Gold futures settled $46.30 higher (+2.4%) to $1,995.90/oz, it's highest close since March 2022, propped up by the follow-through of yesterday's Fed announcement.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $102.33.
Trying to rebound after yesterday's sharp declines
The S&P 500 futures are up 13 point and are trading 0.3% above fair value. The Nasdaq 100 futures are up 101 points and are trading 0.3% above fair value. The Dow Jones Industrial Average futures are up 10 points and are trading 0.1% above fair value.
The stock market is poised for a higher open, trying to recover somewhat after yesterday's sharp declines as investors continue to digest the Fed's latest rate hike and subsequent commentary from Fed Chair Powell. Many mega cap stocks are seeing sizable gains this morning, giving a nice boost to the broader market.
Following rate hikes by the European Central Bank last week and the Federal Reserve yesterday, the Swiss National Bank announced a 50-bps rate hike to 1.50%, as expected, and said the country's bank crisis over. Also, the Norges Bank raised its rate by 25 bps to 3.00%.
The Bank of England announced a 25 basis points rate hike, as expected, following the U.K.'s hotter than expected February Consumer Price Index earlier this week.
Coinbase Global (COIN) is down big this morning after receiving a "Wells Notice" from the SEC stating recommending enforcement action alleging violations of federal securities laws.
Treasury yields are little changed from their settlement levels yesterday. The 2-yr note yield is unchanged at 3.97% and the 10-yr note yield is down one basis point to 3.48%.
Initial jobless claims for the week ending March 18 decreased by 1,000 to 191,000 (Briefing.com consensus 204,000) while continuing jobless claims for the week ending March 11 increased by 14,000 to 1.694 million from last week's revised level of 1.680 million (from 1.684 million).
The key takeaway from the report is that initial claims remain at a low level, pointing to little recent change in the health of the labor market.
Other economic data releases today include:
- 10:00 ET: February New Home Sales (Briefing.com consensus 650,000; prior 670,000)
- 10:30 ET: Weekly natural gas inventories (prior -58 bcf)
Trupanion rolling over today following executive shake-up, soft outlook from partner Chewy (TRUP)
Trupanion (TRUP), a provider of pet insurance for cats and dogs, is rolling over today and with today's substantial losses, shares are now trading at its lowest levels since early November of last year.
- This morning, the company announced a few changes to its executive team, including the departure of CFO Drew Wolff, who is leaving to pursue other interests. Wei Li, Corporate Controller, will temporarily take his spot as interim CFO until the company finds a permanent replacement. TRUP also announced its EVP of Pricing and EVP of Legal & Regulatory will be leaving the company.
The shake-up comes at a sensitive time for TRUP, which has struggled to deliver consistent financial results in this challenging economy.
- While the company managed to edge past EPS and revenue estimates last quarter, it missed bottom-line expectations in each of the previous nine quarters. Furthermore, TRUP's net losses have been worsening as its top-line growth tapers off from the upper-30% range seen in late 2020 and early 2021 to the upper-20% range seen in the past two quarters.
- This subpar performance has made the stock a favorite among the short selling crowd with about 25.5% of the float residing on the short side. It's highly likely that today's steep sell-off is partly attributable to short sellers piling on.
Some potential instability at the executive level -- at least in the near-term -- isn't the only issue that's hammering the stock.
- Yesterday, online pet food and supply company Chewy (CHWY) reported upside Q4 results, but its active customers slipped to 20.4 mln from 20.5 mln in the preceding quarter.
- More problematic, though, is that the company doesn't expect to return to net add growth until 2H23 and its inline FY23 revenue of $11.1-$11.3 bln (growth of 10-12%) suggests that net adds will be pretty soft for the year. This prompted a downgrade to Hold from But at Deutsche Bank following the report.
Why does this matter for TRUP?
- In late 2021, CHWY and TRUP announced a partnership to offer an exclusive suite of pet health insurance and wellness plans to CHWY's customers. CHWY offers customers both preventative care wellness plans and comprehensive insurance plans for accidents, illnesses, and chronic conditions. Therefore, if CHWY's active customer growth is sliding, then that indirectly effects TRUP's potential growth.
The main takeaway is that TRUP is taking hits from multiple sides today. However, the sell-off looks overdone in our view since a shake-up at the executive level may be what the company needs to ultimately turn things around.
Worthington rises sharply following surprisingly strong FebQ earnings (WOR)
Worthington (WOR +14%) is up sharply today after reporting Q3 (Feb) results last night. We like to keep an eye on Worthington as it gives us a window into the health of the manufacturing environment. As a steel processor, WOR is sort of a middle man between the steel producers and manufacturers, with exposure to automotive, construction, industrial, agriculture, retail, and energy. So it gets a good view of the production side and the OEM side, which we find to be helpful.
- Revenue fell 19.9% yr/yr to $1.10 bln, but that was much better than the single analyst estimate. The sales decline was mostly caused by its largest segment, Steel Processing, where sales fell 28% yr/yr to $757 mln, primarily due to lower average selling prices. WOR noted that the market price for hot rolled steel averaged $1,400 per ton in Q3 last year, but that fell to just over $700 per ton this year. So a lot of that is out of WOR's control.
- From a demand perspective for its SP segment, WOR said it is seeing modest increases in automotive production, but WOR experienced softness in construction, which has been impacted by rising rates and the related slowdown in both residential and non-residential construction. Turning to WOR's other segments, Consumer Products sales were up slightly yr/yr at $163 mln while Building Products sales jumped 14% yr/yr to $152 mln.
- Investors are pleased with WOR's Q3 results, especially considering it incurred significant inventory holding losses from falling steel prices in late 2022. WOR says this trend has since reversed itself with steel prices rising swiftly by $550 per ton during the current quarter. The bottoming of steel prices, along with depleted inventories at many of its customers, led to steady demand across its end-markets. However, WOR did caution that the Fed raising rates is starting to impact banks' lending practices.
- Of note, WOR is in the process of spinning off its SP business, which it expects to complete by early 2024, resulting in two independent, publicly traded companies. The post-separation Worthington (New Worthington) will focus more on fast-growing, attractive end markets in Consumer Products, Building Products and Sustainable Energy. The post-separation Steel Processing business (Worthington Steel) will continue as a steel processor.
We think it is a good thing to allow the more growth-oriented New Worthington to trade freely and perhaps garner a richer multiple. Steel processing is less growth-oriented and is more cyclical. It buys steel coils from the steel mills, then adds value via cutting, blanking, cutting-to-length etc. and sells to smaller end users in various industries like automotive, appliances, HVAC. The divergent Q3 results are a good illustration why WOR wants to split up its segments. Based on the stock reaction, investors appear to be quite enamored with Worthington's Q3 report.
Chewy's surprise profit in JanQ overshadowed by several concerning developments (CHWY)
Online pet supply retailer Chewy (CHWY -7%) may derive a smaller percentage of its revenue from hard goods than Petco Health and Wellness (WOOF). However, the dampening discretionary spending levels WOOF experienced in JanQ similarly hurt CHWY in Q4 (Jan).
The company still topped quarterly earnings and revenue estimates, even delivering profitability when analysts expected a net loss. However, these bright spots were overshadowed by several concerning developments in Q4, including no expected margin expansion in FY24, lingering discretionary spending softness, and possibly lousy timing on expanding overseas.
- Net sales climbed 13.5% yr/yr to $2.71 bln in Q4, assisting in CHWY's $0.16 adjusted EPS figure, well above consensus, which called for negative earnings. At the same time, gross margins expanded by 270 bps yr/yr to 28.1%, driven by favorable pricing comparisons relative to 4Q23. Like we saw from WOOF, nondiscretionary categories, like consumables and health care, remained pillars of strength for CHWY in Q4, driving another quarter of double-digit sales growth.
- However, softness in discretionary categories, such as hard goods, partially offset sales. CHWY's roughly 31% revenue allocation to these products may be less than WOOF's ~40%, but it is still proving significant enough to impact top-line growth.
- Meanwhile, active customers fell by 0.1 mln sequentially to 20.4 mln. Management attributed the decline to the ongoing weakness in discretionary spending. Although this means that active customer growth should return once discretionary spending levels rebound, it is still not a good look, especially since CHWY has not seen a sequential improvement in active customers since 4Q22.
- In FY24, CHWY expects double-digit sales growth to continue, forecasting $11.1-11.3 bln or an 11% jump yr/yr at the midpoint. However, its adjusted EBITDA margin projection of flat to 50 bps below its margins of 3% in FY23 was discouraging, as was its expectation of no gross margin expansion this year. The weak margin forecasts stem largely from CHWY's investments in its international launch and other growth initiatives, such as improving its supply chain.
- It is worth pointing out that CHWY's guidance incorporated an appropriate level of caution given the uncertainty in the macroeconomy. As such, if conditions begin to turn around, CHWY can exceed its FY24 outlook.
- Additionally, management believes there is more runway left for incremental gross margin expansion beyond FY24.
Bottom line, deflated discretionary spending is weighing on CHWY's revenue and active customer growth. With inflationary pressures remaining stubborn and nearly a third of CHWY's sales branching from hard goods, the company may continue seeing meaningful pressure on its future quarterly results. CHWY's international expansion plans may also not be coming at a good time, as macroeconomic headwinds combined with overseas investments could further pressure future earnings.
KB Home delivers upside results as cooling mortgage rates spark upswing in demand (KBH)
California-based homebuilder KB Home (KBH) is looking constructive today after comfortably beating EPS and revenue expectations for 1Q23, while also providing an encouraging update on recent business trends.
- Following a tough December, demand began to pick up in January and continued to accelerate into February, propelling KBH to its upside results. More specifically, gross orders increased by 64% in January relative to December, and February increased by 58% compared to January. The key catalyst that's sparking this rebound is the recent cool down in mortgage rates, which have settled in the low-to-mid 6% range.
- Overall for the quarter, net orders dove by 49% yr/yr to 2,142, but that this still better than the 50-60% plunge that KBH was anticipating.
Better yet, the momentum that was building in January and February has continued into March as net orders have remained strong.
- For the first two-and-a-half weeks of 2Q23, net orders were down by 24% yr/yr against a difficult year-ago comparison. While KBH expects 2Q23 net orders to decrease by 14%, based on the mid-point of its 3,000-3,700 net orders guidance, that represents a significant improvement from the high double-digit declines that KBH has been experiencing lately.
- Along with stabilizing mortgage rates, KBH's expansion into regions beyond the west coast is also benefitting the company as it diversifies its geographic footprint.
- In particular, KBH's focus on the southeast region of the U.S. is paying dividends. Total revenue in this region is now approaching the 20% level compared to just 11% five years ago. KBH intends to expand further in the southeast due to the improved profitability and growth seen in certain markets there.
One minor blemish is that housing gross profit dipped by 60 bps yr/yr to 21.8% (excluding inventory-related charges) as KBH offered more concessions to generate orders and as constructions and labor costs remained high. However, the company did exceed its housing gross profit outlook of 20.0-21.0% as average selling prices were still up by 2% yr/yr to $494.500.
There is plenty of uncertainty clouding over the housing market, especially with anxieties regarding the banking industry growing, but KBH felt confident enough to provide more detailed FY23 guidance this time around.
- Recall that last quarter, the company only offered housing revenue guidance of $5.0-$6.0 bln for FY23, citing significant uncertainties and a lack of forward visibility as its reasons for limiting its outlook.
- Last night, not only did KBH slightly boost the mid-point of its forecast by guiding for housing revenue of $5.0-$5.9 bln, but it also guided for housing gross profit margin of 20.5-21.5% and housing operating income as a percentage of revenue of 10.0-11.0% (assuming no inventory-related charges).
The cherry on top is that KBH also authorized a new $500 mln stock repurchase program, further illustrating its more upbeat view. The bottom line is that business conditions are far from booming for KBH or any other homebuilder, but the stabilization of mortgage rates and the prospects of a slowdown or pause in future rate hikes is a significant positive for the company and the industry.
Darden Restaurants serves up a nice EPS beat with healthy comps (DRI)
Darden Restaurants (DRI -0.2%) is trading modestly lower despite reporting solid Q3 (Feb) earnings results this morning. DRI operates several restaurant chains, including Olive Garden and LongHorn Steakhouse. This was its largest EPS beat in the last six quarters. DRI also raised the mid-point of its FY23 EPS guidance by more than the Q3 beat, which implies a slight raise for Q4 (May).
- DRI reported robust comps at +11.7% on a consolidated basis, which was better than street ests, and despite facing several weeks of severe winter weather. Comps were led by OG at +12.3% but LH was no slouch at +10.8%. Fine Dining at 11.7% was also impressive. As we said in our preview, we expected some robust comps because DRI was lapping Omicron in January 2022. So this was great to see, just not a huge surprise and maybe helps explain why the stock is not up more.
- A highlight of the quarter was DRI increasing its FY23 comp guidance to +6.5-7.0% from +5.0-6.5%. This was the second quarter in a row where DRI upped its FY23 comp guidance. On the call, DRI said this new level computes as Q4 (May) comp guidance of +3-5%. It also implies Q4 sales of $2.73-2.78 bln and EPS of $2.43-2.58.
- On the call, DRI noted that OG and LS set new all-time weekly sales records during the holidays, only to break them during Valentine's week. Its restaurants continue to be well-staffed and manager staffing remains at historic highs. Its internal guest satisfaction ratings remain exceptionally strong.
- Despite the strong sales, higher costs remain an issue. Food and beverage expenses rose 110 bps, driven by commodities inflation of 9%, which was higher than DRI had anticipated and significantly outpaced pricing of 6.3%. Chicken, dairy and grains continue to experience the highest levels of inflation, but each improved relative to Q2. However, beef inflation increased from Q2 and drove the majority of the higher-than-anticipated commodities inflation. On the positive side, restaurant labor was 120 bps better than last year as DRI benefited from sales leverage despite hourly wage inflation of 8%.
Overall, this was a very good quarter with the robust EPS beat and strong comps being the main highlights. We think the modest stock reaction is because a good result was probably priced in already. We mentioned in our preview that lapping Omicron should energize comps, so that was not a big surprise. We like the recent stock action. After being in a narrow trading range in the $140-150 area since early November, the stock has recently broken above that range which is a good sign. Finally, we think this report bodes well for other sit down restaurant stocks set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.
The Big Picture
Last Updated: 17-Mar-23 15:37 ET | Archive
Banking crisis a soon-to-be shock to earnings estimates
Market participants have been clamoring for relief on the interest rate front, and, boy, have they gotten it. The question, though, is at what cost?
Something Shocking This Way Comes
The 2-yr note yield plunged 79 basis points this week to 3.80% and the 10-yr note yield dropped 31 basis points to 3.39%. A little over two weeks ago, the 2-yr note yield stood at 5.06% and 10-yr note yield hit 4.10%.
The rapid reversal wasn't precipitated by some unequivocally friendly inflation data. It was precipitated by the shocking failures of Silicon Valley Bank and Signature Bank.
We say shocking because those failures happened almost overnight and because Fed Chair Powell didn't give any hint in his semiannual monetary policy testimony the week before that he was concerned about systemic risk to the banking system.
It was not a good look for the Fed Chair and the Federal Reserve's supervisory capacity. They missed it, but to be fair, so did just about everyone else. Prior to last week, there were no public calls or research notes screaming that a banking crisis was at hand.
Nope. The focus on March 8 was whether the Fed would raise the target range for the fed funds rate by 50 basis points at the March 21-22 FOMC meeting.
On March 10, before the close of trading, Silicon Valley Bank was taken over by regulators. On March 12 Signature Bank was closed by its state chartering authority, and later that evening Treasury Secretary Yellen, Fed Chair Powell, and FDIC Chairman Gruenberg issued a joint statement noting that all depositors at these banks would be made whole under a systemic risk exception.
The Fed also introduced a Bank Term Funding Program designed to stem deposit runs on other banks by accepting high-quality assets as collateral at par value.
And just like that, it was evident to the world that the U.S. banking sector had a crisis on its hands. The characterization that this is a crisis might be debatable. It certainly doesn't have the same characteristics as the financial crisis of 2008-2009 (thankfully), but the Treasury Department, Federal Reserve, and FDIC have themselves deemed it a crisis by invoking the systemic risk exception.
Some of the more unnerving elements of this latest bank "crisis" are that the decline in Treasury yields accelerated, and that bank stocks continued to decline, after the depositor rescue plan was announced. Also, Credit Suisse (CS) was compelled to engage the Swiss National Bank to shore up its liquidity position.
Remarkably, what hasn't gone down (yet) are earnings estimates.
A Loaded Question
On March 8 the forward twelve-month earnings estimate for the S&P 500 was $226.19. Today, it sits at $226.66.
We can't help but ask the question: do you think the 12-month outlook for earnings got better or worse since this latest banking crisis came to light?
We'll load that question with the added insight that just about everyone now is labeling this banking crisis a disinflationary/deflationary force beyond the short term and is suggesting that banks of all stripes will be tightening their lending standards, managing their balance sheets more conservatively, and facing net interest margin pressures as they are forced to raise interest rates on deposit accounts.
When banks go into protection mode so to speak, it is not a good thing for growth prospects. Credit is the lifeblood of economic expansion, and when there are blood clots in the flow of credit, the economy suffers.
Accordingly, calls for the economy to experience a recession have picked up since the dawn of this latest banking crisis and many pundits are again pointing to the Treasury yield curve as their guide, only not because the 2s10s spread is widening further but because it is steepening.
That is, short-term rates are falling more rapidly than long-term rates on the assumption that weak economic conditions are going to force the Fed to cut rates. The widening in the 2s10s spread might be looked at as the canary in the coal mine, but the steepening in the wake of an adverse development is seen as the canary dying in the mine.
There may still be a chance for the canary to escape, but its survival will have a lot to do with how this banking crisis resolves itself both in terms of form (an abatement of deposit concerns) and function (the extent of bank lending activity).
Nevertheless, there is little doubt that the economy has been harmed by this crisis, which has compounded an already high sense of uncertainty and has created excess volatility in the capital markets that should weigh further on consumer and business confidence.
Growth Concerns in the Mix
The concerns about a slowdown in growth on account of the banking crisis were not limited to the Treasury market. Since March 8, WTI crude futures prices have fallen 13% to $66.39 per barrel, copper futures have dropped 3.2% to $3.90/lb, the ICE BofA U.S. High-Yield Index Option-Adjusted Spread has widened 84 basis points to 4.93%, and the S&P 500 Materials Sector has declined 7.6%.
Conversely, the Vanguard Mega-Cap Growth ETF (MGK) has risen 2.2%, versus a decline of 1.8% for the S&P 500, in the equivalent of a flight-to-safety trade within the stock market, as mega-cap issues like Apple (AAPL) and Microsoft (MSFT) are seen as having fortress balance sheets, sufficient distance from the banking issues, and the ability to hold up better than most if economic times do get quite tough. Over the same period, the Invesco S&P 500 Equal Weight ETF (RSP) has declined 5.8%.
The uncertainty about how difficult things might get will impede spending decisions and lead to more conservative management overall by companies outside the banking industry.
That would be considered a textbook response, but relative to earnings expectations, it is a new revelation to account for that wasn't accounted for as much a little more than a week ago. What market participants also have to account for is the potential for collateral damage beyond the banks.
To that end, a favored trade before the banking crisis was to be long oil and short Treasuries. Any money manager levered up on those positions would naturally have some exposure issues on their hands. That's not to say they didn't cut their risk, but it is not unusual after a crisis that leads to outsized movement in prices to hear that a fund is in trouble and/or that some forced liquidations are taking place.
Thus far, it has been quiet on that exposure front, but one shouldn't be surprised if such a story arises knowing that talk of liquidity crunches has been injected into the market narrative.
We digress.
What It All Means
The collateral damage in a collective sense should be showing up soon enough in declining earnings estimates. That will be particularly true for the banks, but if the economy stumbles like many think it will because of the banking crisis, it will be true of most companies.
That thinking has yet to make its presence felt in the forward twelve-month earnings estimate, but the banking crisis should soon be forcing a recalibration of earnings models.
We suggested in mid-February that earnings estimates for the second half of 2023 would be at risk along with the economy. Admittedly, that view didn't envision a banking crisis being part of the equation, but it is now.
Sure, it might strike some as hopeful that market rates have come way down in the last few weeks and that the Fed's terminal rate might not stretch as high as previously feared only a week ago. Some might see that as a basis for multiple expansion.
The impetus for those shifts, however, hasn't been anything good. On the contrary, the impetus has been a negative shock to the economy that is going to be worse for earnings prospects. That is a basis that should keep the stock market in check because it is difficult to find a bottom in stock prices when confidence is low that there has been a bottom in earnings estimates.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be published the week of April 3)
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