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This will certainly be an interesting week, especially with the Federal Reserve meeting scheduled for Wednesday. I anticipate that Jay Powell will raise interest rates on Wednesday, indicating that more rate hikes are on the horizon. The silence from the Fed over the past week has been quite noticeable, with no significant commentary following the release of the higher core CPI data, even from sources such as The Wall Street Journal. While the Fed is in a blackout period leading up to the meeting on Wednesday, there is usually some media speculation about its next move, but there has been next to nothing this week.
This lack of communication leads to questions about the Fed’s likely action. However, by analyzing the commentary from Fed officials over the past year, it seems reasonable to assume that the Fed will continue raising rates, as the banking issues are likely, not new. For months, the Fed must have known that banks were sitting on significant losses in their held-to-maturity assets; in retrospect, this should have been apparent. Anyone who bought a 10-year note at 1.5% is now losing money if marked to market. Investors who should have known the potential risks were not, as evidenced by the 25% increase in the KBW Bank Index from the October lows to the February high.
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Even by the end of the second quarter of 2022, banks such as Bank of New York Mellon experienced losses on their held-to-maturity and available-for-sale assets. During that period, the Fed raised rates at 75 basis point increments. These losses grew larger after the fourth quarter, and the Fed continued raising rates in February.
The Fed is faced with the choice of either not raising rates or continuing to press ahead. If the Fed stays true to its statements over the past year, then these challenges were to be expected. After all, Jay Powell informed us at Jackson Hole that there would be some pain and that this was the cost of reducing inflation. If the Fed genuinely believes that price stability is necessary for financial stability, it must continue to raise rates. Otherwise, its past statements and guidance will lose credibility, and the markets may never trust this Fed again.
With the new Bank Term Lending Facility, it seems that any bank needing funds can access the facility, take a loan based on the par value of its bonds, and shore up its balance sheet. This should mean that even if the Fed continues to raise rates, all banks should be able to weather the storm. There is also $2 trillion per day entering the Reverse Repo facility. If that money were redirected, bank reserves would increase significantly, providing even more liquidity for banks. However, the Reverse Repo facility is being utilized daily, resulting in reserves remaining at the lower end of the range.
S&P 500 (SPX)
Meanwhile, the S&P 500 finished lower on Friday, with the March options expiration now complete. This development should free the major indexes and enable them to trade more freely. The S&P 500 appears to have formed a bear flag over the last few trading sessions, and if this is the case, we can expect the futures and cash index to test the 3,800 support level again this week. A rally to the upper end of the channel would allow the S&P 500 to approach 4040, however, I do not think that is the likely path.
Dow Jones Industrial (DJIA)
The Dow also appears rather weak and is likely to revisit its October lows, having completed a diamond reversal top a couple of weeks ago. Some support has been observed around the 32,000 area on the chart, but a decline below 31,400 could pave the way for a drop back to 30,000.
United Health (UNH)
United Health, another major Dow component, experienced a significant upward move and has been consolidating for months since. The stock has fallen below its long-term uptrend and is now trading at the lower end of the cha
nnel. A break of the trading channel would be a negative signal and could set the stage for a decline to fill the gap at $404.
Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.