May 2023 Insights
Happy May and Happy Mother’s Day to all mothers!
I wish I had better news to report than continued volatility in markets due to several key factors. I’ll outline the factors and then speak of opportunities.
The Fed. The Fed raised rates 25 basis points last week as expected for now a new total of 5-5.25% interest. Chair Powell hinted that we might be coming to the end of the rate hiking cycle. Some believe the Fed might even cut rates in Q4 of 2023. Keep in mind that Powell has routinely stated he wants to reach the 2% inflation target that we remain far from. Financial research explains that markets are most stable at 1% inflation just for consideration if you believe 2% is too low. The Fed’s balance sheet has swollen to $4.5 trillion.
The debt ceiling. It is becoming bigger news as Yellen just announced that the US could default as early as June 1 which is far sooner than anticipated. Expect market volatility as we approach this date with the likely and incorrect outcome of politicians kicking the issue down the street as they’ve done consistently. More to come on this issue.
Continued bank failures. Front page news has been the downfall of First Republic Bank (FRB), bailed out and repackaged as a sale to JP Morgan Chase. The former runaway success story and darling of Wall Street lost $100 billion in deposits and represents the second largest bank failure in history behind Washington Mutual, and of course on the heels of other notable bank failures. Pac West Bancorp immediately followed FRB in its downfall plummeting in the stock market due to a loss of 20% of deposits. I don’t believe the story ends here as I’ve stated previously. This is a lesson in what happens when investors get jumpy on top of the long-term bank investments in mortgage-backed securities and US Treasury bonds. The downfall of FRB, a firm that was technically well managed, is certainly notable. It speaks to the power of investors to abruptly and without notice, significantly change a situation. Moreover, it speaks to something far greater than I’m going to outline in a separate thought piece. I will be releasing this piece in the coming days and do hope you’ll take the time to read it because it provides perspective at a macro level that is worth considering both in terms of how you choose to invest, and the kind of policy we all decide to get behind. My role is to conserve ballast and grow your wealth towards your goals, I only offer this information to that end as I am only beholden to you, my clients.
Regarding the failure of First Republic specifically, in mid-March, the bank received a helping hand from a number of banks to the tune of $30 billion. Now, $173 billion in loans, $30 billion in securities, and $92 billion in deposits heads to JP Morgan Chase. It is important to note that this cost the FDIC $13 billion from the Deposit Insurance Fund (DIF), which ultimately impacts taxpayers. Additionally, JP Morgan received $50 billion in fixed rate financing from the feds.
All of this is the ultimate impact of low interest rates and monetary policy for 20 years up to the Fed’s rate hikes starting in 2022. This has led investors to seek quick profits instead of long term, potentially riskier, investments in productive growth such as infrastructure, machinery, and equipment – fundamental to the real growth of an economy. Growth over the last 20 years can be attributed primarily to asset growth – both financial and real estate, with real productive growth only 23%. In addition, the global increase in indebtedness has outpaced GNP by 2.5 times in the last 20 years when prior, the two were in lockstep. It begs the question, why are the ruling global elites ignoring the impact of this deviation in correlation under low interest rates and monetary policy and the serious threats they present to markets and the economy as we know it?
Current investment opportunities. There remain opportunities in the market which require careful selection. One look at the differences in the sector weightings of the S&P 500 value versus growth explains how much the investing landscape has changed prior to the runup that ended in late 2021. At Lion’s Eye Wealth, we are active and tactical managers, sizing up the market and seizing opportunities on your behalf. We are keen on a factor-based assessment of value and growth based on positive earnings, revisions/surprises, a strong balance sheet, proper interest coverage, and lower volatility. There are opportunities in consumer staples and discretionary spending, energy, healthcare, and select tech and communications.
Have confidence in the fact that we monitor changes and reallocate your portfolio in this changing investment landscape. Please don’t hesitate to ask if you have any questions on this content or your portfolio itself.
