The current U.S. stock bear market cycle is nearly complete, and investors are waiting for a buy signal.
The U.S. stock market started the year with a strong rally, but over the past month, that positivity has started to fade. The collapse of Silicon Valley Bank raised fears of contagion and the ensuing bank runs that were only partially offset by federal regulatory measures.
There is a growing consensus that the actions of the federal government created the conditions for the banking crisis. Previously, the Fed raised interest rates to fight inflation; now, investors are trying to deal with the aftermath: simmering bank problems, persistently high inflation, and higher interest rates.
The bear market is over
But not all is bleak. “What we’re seeing now could signal the beginning of the end of the bear market,” said Mike Wilson, Morgan Stanley’s chief U.S. equity strategist. For stock investors, the market situation is positive.
Wilson said that as earnings expectations and valuations continue to fall, U.S. stocks will continue to fall, but the stock market will not stay low for long. The current U.S. stock bear market cycle is nearly complete, and investors are waiting for a buy signal.
”I don’t think we’re going to be at very, very low prices for a very long time, regardless of how the next three to six months end up properly adjusting valuations and lowering valuations,” he said. “We’re not in a long-term , a structural bear market, but a cyclical bear market with a certain degree of completion.”
Now the market focus turns to the first-quarter earnings season starting in mid-April. Year-to-date profit estimates have fallen by the same amount as the previous two quarters, suggesting earnings have not yet bottomed out, Wilson said. He added that the threat to margins from higher inflation remained “underappreciated” given expectations of a sharp recovery in profits in the second half of the year.
Bank of America sees yet another bubble in the wake of US and European banking woes that have roiled markets recently.
Specifically, Bank of America analysts led by Michael Hartnett said that money funds are the new hot asset. Assets under management of money funds have surpassed $5.1 trillion, an increase of more than $300 billion in the past four weeks. They also counted the largest inflows in the cash space since March 2020, the largest six-week inflows on record in U.S. Treasuries, and the largest weekly outflows in investment-grade bonds since October 2022.
The last two surges in money market fund assets (2008 and 2020) saw the Fed cut interest rates. “When the Fed starts to panic, the market stops panicking,” Hartnett said, noting that surges in the Fed’s emergency discount window borrowing have historically occurred near stock market lows.
One difference this time is that inflation has become a reality and labor markets in other industrialized countries, not just the US, remain exceptionally strong. The Bank of America team counted 46 rate hikes this year, including one after the Swiss National Bank rescued Credit Suisse.
”History tells us that credit and equity markets have been too greedy for rate cuts and not enough recession-feared,” the Bank of America team said. After all, when banks borrow from the Fed in an emergency, they tighten lending standards, which in turn Going over would lead to lower lending, which would lead to less optimism among small businesses and ultimately a collapse in the labor market.
Economists at Jefferies said they expect regional banks to tighten credit standards when lending to small businesses, leading to layoffs in the coming weeks.
The latest data showed that the number of people filing for unemployment benefits remained almost steady, suggesting that the overall labor market remains strong despite announcements of layoffs by large companies. Economists said: “The strength of the data reminds us that the decline in labor market strength we expected began with an extremely strong situation, which will take time to manifest
” The Federal Reserve announced that it will raise the target range of the federal funds rate by 25 basis points to between 4.75% and 5%, the highest level since October 2007, in order to achieve the goal of maximum employment and the inflation rate falling back to 2%.
Federal Reserve Chairman Powell said that if individual banking problems are not resolved, the banking system may be threatened. He will continue to monitor the situation closely and is ready to use all tools to ensure the safety and soundness of the banking system.
At the same time, the Federal Reserve also announced that it raised the reserve balance interest rate by 25 basis points to 4.90%, and raised the discount rate to 5%, all in line with expectations.
The decision to raise interest rates may be the most difficult decision made during Powell’s tenure. The Fed is caught in the “dilemma” of banking crisis and inflation crisis.
In early March, the sudden collapse of Silicon Valley Bank in the United States set off a super storm in the European and American banking industry. Subsequently, UBS quickly acquired Credit Suisse, a crumbling century-old bank. Global regulators had to take urgent action to support the financial system. The Federal Reserve A new arrangement to help banks has also been urgently rolled out.
Powell emphasized that the failure of Silicon Valley Bank was an exception and that there were no widespread weaknesses in the U.S. banking system. He said that the deposit flow of the US banking system has stabilized, and the banking system is healthy and resilient. He stressed that the rate hike has been fully priced in and many banks are able to handle it. He stressed that depositors should take it for granted that their deposits are safe.
Powell revealed that when interest rates are rising, it is not surprising that various companies, including banks, face interest rate risks. Before the crisis, the Fed’s regulatory team had cooperated with Silicon Valley Bank. But he said the pace of the bank run in Silicon Valley is very different from what we have seen in the past, and the speed at which the bank run in Silicon Valley has occurred suggests that changes in regulation and oversight may be needed.
Rate hike pause?
Powell said that higher interest rates and slower economic growth are having a dragging effect on U.S. companies, but almost all FOMC members believe that the risks facing U.S. economic growth are mainly tilted to the downside.
Powell said that the current level of inflation in the United States is still too high, the labor market is still too tight, and the Federal Reserve is still strongly committed to reducing the inflation rate to the established target of 2%.
At present, the market is more concerned about whether the Fed’s 25 basis point rate hike will become a “watershed” in this round of rate hike cycle. The latest interest rate dot plot shows that 18 Fed officials overall expect the federal funds rate to reach 5.1% by the end of 2023, which means that the Fed may only have room to raise interest rates once during the year, and the rate hike will be 25 basis points.
Traders in the U.S. stock market have already bet that the Federal Reserve may pause interest rate hikes in May and have a high probability of cutting interest rates within the year. But asset management firm BlackRock believes the market may be too optimistic. According to BlackRock’s expectations, the Fed will continue to raise interest rates, and it is impossible to cut interest rates within this year.