Stocks absorb Fed, bank volatility

US stocks gained ground last week, but it was a bumpy ride as traders and investors navigated lingering bank volatility and the Federal Reserve’s ninth rate hike in a little more than a year.

The S&P 500 (SPX) hit a two-week intraday high shortly after the Fed’s rate announcement last Wednesday, but reversed to close lower for the day. A solid gain on Friday after some early weakness ensured the index’s first back-to-back up weeks since early February:

The headline: Investors balance rate hike with dovish comments, bank-sector fallout.

The fine print: Last Wednesday Fed Chairman Jerome Powell suggested the long-awaited rate-hike “pause” may not be too far away, and described the US banking system as “sound and resilient.” But he added the regional bank turmoil could lead to tighter credit conditions and, ultimately, weigh on the economy. Morgan Stanley & Co. analysts noted that recent events “may be the catalyst that finally convinces market participants that [stock market] valuations are way too high.”¹

The number: -1%, the decline in durable goods orders last month—not as big as January’s 5% drop, but well below the consensus estimate for a 1.5% increase.

The move: Before closing at 3.38% on Friday, the 10-year T-note yield fell to 3.29%—the lowest it’s been since September 13, 2022—as bank-sector volatility continued to push investors toward Treasuries and other “safe havens.” (Treasury yields fall as their prices rise.)

The scorecard: The Nasdaq 100 (NDX) tech index rang up its fourth-straight week as the strongest major US index:

Sector returns: The strongest S&P 500 sectors last week were communication services (+3.3%), energy (+2.1%), and materials (+2.1%). The weakest sectors were real estate (-1.5%), utilities (-1.3%), and consumer discretionary (+0.4%).

Stock movers: First Republic Bank (FRC) +30% to $15.78 on Tuesday (after falling 47% on Monday),  GameStop (GME) +35% to $23.87 on Wednesday. On the downside, Via Renewables (VIA) -21% to $21.03 on Wednesday, Trupanion (TRUP) -27% to $41.19 on Thursday.

Futures: Gold topped $2,000/ounce for the first time in more than a year last Monday, but April gold (GCJ3) ended the week only modestly higher at $1983.80. May WTI crude oil (CLK3) rebounded early last week, but pulled back on Thursday and Friday to end the week up around $2.20 at $69.26/barrel. Week’s biggest up moves: May oats (ZOK3) +5.9%, May cocoa (CCK3) +5.3%. Week’s biggest down moves: April VIX (VXJ3) -10.3%, May soybean oil (ZLK3) -7.3%.

Along with the Fed’s go-to inflation barometer (PCE Price index), this week brings home prices, consumer sentiment, and consumer confidence:

●Monday: Dallas Fed Manufacturing Index
●Tuesday: Retail and Wholesale Inventories (advance), Goods Trade Balance (advance), S&P Case-Shiller Home Price Index, FHFA House Price Index, Consumer Confidence
●Wednesday: Pending Home Sales
●Thursday: GDP (Q4, final revision)
●Friday: Personal Income and Spending, PCE Price Index, Chicago PMI, Consumer Sentiment

This week’s earnings include:

●Monday: BioNTech (BNTX), Carnival (CCL),
●Tuesday: Walgreens Boots Alliance (WBA), Cal Maine Foods (CALM), Lululemon Athletica (LULU), Micron Technology (MU), Progress Software (PRGS), TD Synnex (SNX)
●Wednesday: Cintas (CTAS), Paychex (PAYX), RH.com (RH), Verint (VRNT)
●Thursday: Neogen (NEOG), Braze (BRZE), Skillz (SKLZ)
●Friday: Provention Bio (PRVB)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

To many traders and investors, it may seem as if the Fed’s rate-tightening cycle and the bear market have gone hand in hand. They’ve certainly overlapped, but one year, one week, and nine hikes since the Fed began tightening monetary policy, the SPX is just 6.8% lower than it was the day before the first rate increase, although the index is still down more than 17% from its January 2022 high.

The following table shows the market’s short-term moves after the hikes have been anything but uniform. For example, after closing higher on the day of the first four rate increases, the SPX closed lower after four of the past five announcements, including last Wednesday:

And while less than a handful of examples isn’t statistically significant, after the three other times the SPX closed lower the day of a Fed hike, it was still lower after a week had passed, and in two cases (after the September and December hikes) extended its loss. But at the two-week mark, the index was even lower only after the December hike. Overall, the SPX’s two-week return was positive five of eight times.

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¹ MorganStanley.com. The Risk of a Credit Crunch. 3/20/23.