In Markets "In a Nutshell"

Markets “In a Nutshell” for March 20, 2023

Investment Week at a Glance

Stocks finished mixed for the week.  The Dow Jones Industrial Average fell 0.10%, the S&P 500 was up 1.4%, and the NASDAQ rose 4.40%. Foreign stocks (MSCI EAFE) were down, falling 3.1%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 3.41%.  (Data source: Wall Street Journal)

Recapping Last Week’s Bank Troubles

Fears around the U.S. baking system continued last week as Silicon Valley Bank & Signature Bank shut down and other fears of other banks collapsing had the market on edge. The government came in to ensure depositors they would have access to their money even if it was over the $250,000 limit insured by the FDIC. Although the government said all deposits were safe there is some worry that people will pull money out of these regional banks and move it to the bigger banks as many consider them “too big to fail”. Although there is still worry about if more banks could collapse, this situation is nothing like 2008 as these banks that collapsed had a unique client base which included many startups and crypto investors and had a bond portfolio that could not handle the rise in interest rates even though this rise had been expected.

How Does This Affect the Fed?

For the first time since early 2021, the Fed has a bigger problem on its hands than inflation. The Fed is no longer able to raise rates just to beat inflation as their rise in rates from 0% to 4.50% is what has caused this stress on banks. The consensus around the fed funds rate was we would see a peak of around 6% this year and then pause. Now after these banking scares, the market is pricing in a 40% chance of a 0.25% rate hike and a 60% chance of no hike this week, and then rate cuts by the end of the year. This could be good news for the market if this is able to stop the Fed from raising rates much more and the banking system is able to get through this scare. This situation is also likely to decline credit growth which could lead to inflation coming down more as less money will be lent out.



How much has the 2-year Treasury Yield dropped since SVB collapsed? (Scroll Down for Answer)

  1.     0.5%
  2.     0.7%
  3.     1.0%
  4.     1.2%


































Answer below.



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4)    1.2%, from 5.06% to 3.86%.  This drop in yields has been very sharp as fears grow around the banking system and the Fed not able to raise rates much more as they had planned. In the past 30 years when the 2-year yield fell below the federal funds rate, it signaled the end of Fed hiking.