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Market Has Bad Breadth
The S&P 500 is up about 3% to start the first quarter of 2023. On the surface things look good. But what if we look ‘under the hood’. Most sectors are lower – especially those which are economically sensitive (like banks, energy, small caps and materials). However, big tech is carrying the market higher. That’s not necessarily a good sign.
Yield Curve: Recession Dead Ahead
2-year bond yields are cratering. Rarely – if ever – have we seen them fall 150 basis points in just three weeks. This signals the bond market sees aggressively rate cuts from the Fed this year. But what would cause this? A recession? Some kind of credit crisis? I can tell you it won’t be because inflation is back to the Fed’s target of 2%. What’s more, the yield curve has steepened sharply. This isn’t good… and if history is any guide… a recession is likely within 12 months.
Market vs The Fed
There is strongly divided opinion on whether the Fed’s decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that’s not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming… one of them has it wrong.
Why I Bought BAC
Stocks are always climbing the “wall of worry”. And there is no end of “worries” today. Perhaps front of mind is the current lack of confidence in the US banking sector. However, I think it represents a great long-term risk reward opportunity in quality large cap banks. Buy when others are fearful and sell when they are greedy. This post looks at why Bank of America could be a good bet… investors have rarely been this fearful.