Opening Market Update: Markets Again Under Pressure

March 24, 2023 Alex Coffey
Stocks fell and volatility rose this morning as banking sector worries persist.

(Friday market open) Bank fears continue to rattle Wall Street, demonstrating how sensitive the market remains to perceived instability in the sector and the volatility that can result. The latest bank in the spotlight is Deutsche Bank, which saw its credit default swaps—the cost to insure against default in the company's debt—jump sharply today.

A "risk-off" mood prevailed early Friday as shares of banks fell again in overnight trading and investors gravitated toward government bonds. The U.S. 10-year Treasury yield dropped 10 basis points to below 3.3%, the lowest it's been since early September. Keep an eye on yields, which can be a barometer of market participants' worries, as well as the dollar, another so-called "safe haven" asset that moved higher this morning. Gold is also rising.

This morning's bank concerns aside, the market is entering a bit of a lull as far as major earnings and data. There's a firehose of information to absorb after the last two weeks of central bank meetings, banking turmoil, and key data, so a quiet period—if it actually occurs amid the market jitters—can be a good opportunity for investors to gather their wits and understand the data and rate news.

We're seeing the market do that in real time, as stocks and Treasury yields vacillated yesterday in choppy trading. On the one hand, there's optimism that the Federal Reserve is nearing the end of its rate hike cycle. This may be welcomed by equity investors—particularly those focused on growth stocks that got battered last year by higher rates—but declining rate hike expectations could indicate that a serious economic hurdle may also be rapidly approaching, which could lead investors to anticipate tougher times and perhaps gravitate toward cash and "safer" assets.

The drop in Treasury yields and crude oil yesterday provided more evidence of economic concerns having a market impact. Gold climbed back above $2,000 an ounce at times, another potential sign of investors thinking the Fed might have to pull back on tightening earlier rather than later.

The next Federal Open Market Committee (FOMC) rate decision is scheduled for May 3—nearly five weeks away and following the release of a massive amount of economic and earnings data. That may seem far from now, but we're likely to hear every day how the market is pricing in probability of a rate increase now that it appears the Fed's taken itself off of autopilot after raising borrowing costs for nine consecutive meetings.

As of Friday morning, banking fears appeared to put on ice chances of another 25-basis-point rate hike in May—down near 24%, according to the CME FedWatch Tool. A growing chorus of analysts suggests the Fed might want to pause what it's doing, take stock of the situation, and consider waiting until June or later to tighten the screws one last time as the Fed eyes its projected "terminal," or peak rate of 5% to 5.25%, versus the current 4.75% to 5%. These analysts' views now appear reflected in the market, though that can change quickly.


Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Eye on the Fed

The Fed continues to walk a tightrope between fighting inflation and reassuring the market that it won't raise rates enough to further damage the banking system. Keep an eye on the credit markets over the next month for signs of tightening that might convince the Fed to pause rate increases.

How can investors get a sense of what the Fed's watching ahead of its May decision? It's a bit esoteric, but the credit market, particularly the "spread," could end up telling the tale.

The credit spread is the difference in yield between a Treasury and another security (debt) with similar maturity date but lesser credit quality. A wider spread means the yields on "riskier" corporate bonds gain versus yields on government debt—a sign that investors are demanding compensation for taking on additional credit risk. This can happen if credit starts to dry up due to banks being choosier about borrowers, which might be the case in the coming months after the recent industry unrest.

When yields on lower-quality debt rise, that raises borrowing costs for consumers and businesses, "tightening" the credit market by reducing demand. This can slow the economy, as Powell indicated in Wednesday's press conference, perhaps doing some of the Fed's policy work for it without the need for much higher interest rates. However, as Powell said, it's hard to compute the impact directly.

Spreads have narrowed this week by about 12 basis points for average investment grade (IG) credit and 17 basis points for average high yield (HY) credit. There was a bit of widening in HY after the Fed meeting from Wednesday into Thursday, but the weekly trend remains one of tightening. For comparison, the IG spread is not even half the level it reached in March 2020 at the start of the pandemic. Spreads will continue to move as the markets react to news, headlines, and economic releases. We will provide updates in the coming weeks, since this issue is so front and center ahead of the next FOMC meeting.

Morning rush

  • The 10-year Treasury note yield (TNX) fell 10 basis points to 3.29%.

  • The U.S. Dollar Index ($DXY) is up, at 103.29.

  • The Cboe Volatility Index® (VIX) futures leaped back above 25, to 25.09, after falling below 22 yesterday.

  • WTI Crude Oil (/CL) dropped sharply to $67.52 per barrel.

Talking technicals: Keep an eye on the 200-day moving average (MA) for the S&P 500® index (SPX), which has been a pivot point recently. It's now near 3,933, and a move below that could conceivably attract more selling. The December lows below 3,800 went untested during last week's market downturn, so that's an area to watch on any move below the 200-day MA.

Just in

Durable Goods Orders for February fell 1% versus expectations for an increase of 0.6%. Excluding transportation, orders were flat.

Consensus was for a 0.7% monthly rise overall and 0.4% excluding transportation, according to Trading Economics. Economists had expected a 0.3% rise in non-defense capital goods excluding aircraft, often seen as a proxy for business spending. That category rose 0.2%. Overall, the data suggest the goods portion of the economy continues to slow, perhaps faster than analysts had expected.

In other economic developments, New Home Sales for February rose 1.1% in February to a seasonally adjusted 640,000 in data released Thursday. That was down about 19% from a year earlier and roughly in line with consensus. Also, the Census Bureau downwardly revised January sales by nearly 40,000. The rather vanilla data comes after Tuesday's surprising report of a 14.5% monthly jump in February Existing Home Sales.

February's report indicated continued firmness in the market for new homes, highlighted by a rise in the average price to just under $500,000. The supply of new homes for sale dropped slightly, which could mean prices are staying solid despite current mortgage rates of well above 6%.

What to watch

Next week wraps up the quarter, and that means we'll get some traditional end-of the-quarter data, including a final government read on Q4 Gross Domestic Product (GDP). Also standing out are the February Personal Consumption Expenditure (PCE) prices and Chicago Purchasing Managers Index (PMI) next Friday.

Market minutes

Here's how the major indexes performed Thursday:

  • The Dow Jones Industrial Average® ($DJI) rose 75 points, or 0.23% to 32,105.
  • The Nasdaq 100® (NDX) climbed 1.29% to 12,729.
  • The Russell 2000® (RUT) fell 0.41% to 1,720, near recent technical support.
  • The S&P 500® index (SPX) rose 11 points, or 0.3%, to 3,948 after earlier testing and retreating from the 4,000 level.

After spending much of Thursday higher, markets sold off in the early afternoon in advance of Treasury Secretary Janet Yellen's prepared testimony to Congress after her statements just 24 hours before sparked fear in the markets. Yellen made a few changes to her prepared remarks to assure that deposits are safe, and she made clear the government is prepared to take additional actions if warranted.

Once Yellen's remarks went public, markets revived a bit but didn't approach their earlier highs. The NDX continued to post the largest gains, helped by decent performance by mega-cap tech stocks including Alphabet (GOOGL) and Apple (AAPL). Investors have gravitated toward these giants lately, partly in response to financial turmoil that led them to seek haven in well-capitalized and familiar names.

On the other side of the equation is the small-cap RUT, which brought up the rear again Thursday amid concerns that smaller companies might be more exposed if there's an economic downturn and tighter credit.

Thinking cap

Ideas to mull as you trade or invest


Checking the gas: According to Goldman Sachs (GS), benchmark Brent Crude oil prices won't reach $100 per barrel this year as it previously forecast, but still could rise significantly from the current levels near $75 per barrel. Speculation of a forthcoming pause to rate hikes by the Fed while demand from China grows are possible tailwinds for oil, GS says, though higher-than-expected Russian production has been a headwind. The firm now expects a peak of $94 this year. Despite recent softness in energy costs, the energy-sensitive Dow Jones Transportation Average ($DJT) is down more than 12% from its early-February peak versus a less than 5% drop for the SPX over that period, suggesting weakness in airline, trucking, railroad, and delivery company stocks going into Q1 earnings season. FedEx (FDX) shares spiked earlier this month when it raised its 2023 earnings guidance, but that's driven partly by cost-cutting as the company sees softer demand in parts of its business. Airline stocks have cratered this month despite the industry's sunny demand forecasts earlier this year. Perhaps an injection of cheaper fuel can improve the outlook.

Cool trillion: Microsoft's (MSFT) market capitalization edged above $2 trillion again yesterday after falling nearly $1 trillion from a late 2021 peak to a late 2022 trough. It's now the second most valuable company in the world after Apple (AAPL), which has also had a big jump in market cap from recent lows. Together, as CNBC pointed out yesterday, the two mega-cap tech companies form about 13% of the weighting of the SPX, meaning they can have a major impact on its path daily. That's why investors should consider keeping an eye on the Equal-Weight S&P 500 index (SPXEW), which has the same components as the SPX but gives each of them equal weight rather than weighting them by market cap. This can often provide a better idea of stock market performance without the overwhelming influence of the behemoths. The SPXEW is down about 1% year-to-date versus a 4% gain for the SPX (through midday Thursday), which shows you the effect mega-cap techs can have when they're on a tear as they've been the last week.

A window on the quarter: Often at the end of a quarter or year, institutional fund managers like to do some "window dressing" on their portfolios, improving their appearance by buying high-flying stocks and selling the stinkers. These "artificial" moves can create increased market activity and a potential opportunity—both long and short trading positions—for traders to consider. Heading into the final week of Q1, the best-performing S&P sectors since December 31 are communication services, information technology, and consumer discretionary. If fund managers snap up strong performers in these sectors and dump losing stocks from poorer-performing sectors like energy, utilities, and financials, we might see more volatility in the days ahead.


March 27: Expected earnings from Carnival Corp. (CCL).

March 28: March Consumer Confidence and expected earnings from McCormick (MKC) and Walgreens Boots Alliance (WBA).

March 29: February Pending Home Sales.

March 30: Q4 GDP-third estimate.

March 31: March Chicago PMI, February Personal Consumption Expenditures (PCE) prices, February Personal Income and Spending, and University of Michigan Final March Consumer Sentiment.

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