When Silicon Valley Bank (SIVB) imploded last week, triggering a brief panic, Federal action quickly began to ring-fence the risk. This week’s implosion at Credit Suisse (CS) set off a new chain reaction among banks in Europe, confirming to many that a global banking contagion must be underway. US authorities have implicitly guaranteed all depositors in all banks, but without an explicit money back promise and a similar edict from Europe, some investors are de-risking, moving from stocks to the relative safety of bonds and cash. Blaming the Fed and its Central Bank mimics in Japan, UK, and Europe for creating 40-year high inflation rates around the world has been a popular game that makes everyone feel smug. These pundits have no easy answers to reverse the damage. A painless recession-free escape route back to a world of low inflation is daunting. Since 1977, our Federal Reserve Bank has long been mandated to achieve maximum employment and price stability (low inflation). Inside of these dual mandates is the task of maintaining financial stability, which today creates opposing goals over the near term. Central Banks need to engage in stimulative measures, backstopping banks and encouraging risk while at the same time, they must deal with the high inflation that requires taking away stimulus and tightening credit conditions. This week’s CPI inflation report continues to reflect an overheating economy that warrants higher short-term borrowing rates and less liquidity. Service sector inflation remains stuck at 40+ year highs. Investors and bank depositors have understandably moved toward mega cap banks where too big to fail guarantees ALL customers. This flight to safety has collapsed yields and provided a tail wind for debt-heavy tech stocks.

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When the implosion at Credit Suisse (CS) sent financial stocks back into a tailspin on March 15th, it reignited panic over the possibility of contagion. What most in the banking world already knew was that CS was a failing Investment Bank for years. As can be seen here, the premium or spread between bond buyers and sellers of CS debt using Credit Default Swaps (CDS) was already large prior to this week’s crisis. Now it has totally blown up and required a bailout from the Swiss Government Central Bank today. Like SVB, this was a unique situation, and in both cases, mismanagement and a failure of Government oversight were the problems. There appears to be nothing systemic currently, which is providing a breath of fresh air for the stock market once again.

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The banking scare in the US and Europe generated one of the sharpest 4-day declines in bond yields on record with the 10-year treasury falling almost eight-tenths of a percent. One way to view such volatility or fear from a longer-term perspective is with the Move Index. This measures the sentiment through price volatility of the Treasury Bond market. Other than the Great Financial (mortgage) Crisis (GFC) of 2008, we just reached one of the highest peaks ever. While the Move Index is viewed as a warning sign of trouble in the financial system, it also can signify extreme fear and an opportunity to begin buying stocks as the old Bear market nears a climax.

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The mini-banking panic in the US last week and in Europe this week are isolated incidents at this point. The European Central Bank (ECB) today hiked its Bank Lending rate by 50 basis points to 3%, totally ignoring any risk of bank contagion in Europe. This was a rare move by the ECB to lead our Fed which will likely raise rates by 25 basis points next week to 4.75%. Without a new panic, we would rule out a No Hike next week as that would exacerbate the panic that is quickly fading away today. With liquidity flooding back into troubled banks and implicit statements of assurance by leading bank regulators, confidence is quickly being restored to the system, providing a green light short term for investors. The bad news is that corporations and venture capital will shift some of their deposits away from the smaller banks which may impede small business this year.

Readers know we raised portfolio cash in February and forecasted a downturn in stocks from about February 15th to mid-March (15th), which thus far appears to have encapsulated the correction. Looking forward, we continue to expect the current 10-month trading range to continue in 2023 defined by the SP 500 Index from the 3500s to 4300s until the economy shows signs of entering a recession with much lower inflation in Q4. Adding to large cap stocks in the Nasdaq and S&P 500, cyber security and defense are warranted over the next week. The next trading range peak is due in the 2nd half of April.

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