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Weekly Market Update for March 17, 2023

by Jim Ulland

This was the week from Hell in the banking sector. As an example of the damage, US Bank is one of the more conservative banks in the US and the fifth largest. Today its stock was down about 9%. Year-to-date the stock is down about 25%. The stock dividend is 5.25% and the forward price/earnings ratio is seven, about half the average ratio of the S&P 500. US Bank is enveloped in contagion, the fear that banks are not as sound as previously believed.

Triggering the uncertainty in banks and their securities was the failure of two banks a week ago – Silicon Valley and Signature. Both banks are being auctioned off with bids due today. If the banks are not sold, they will be broken up and sold in pieces. A successful sale will help bring back some stability to the market. The Fed did provide bridge loans to all banks, allowing them to borrow money to pay deposit withdrawals without having to sell securities at a loss. The rapid pace of interest rate increases, mandated by the Fed, has caused large losses in banks’ investment portfolios. If the banks can hold their portfolios to maturity, they get their money back without loss. However, if a bank faces a deposit run, it is forced to sell securities – often at a loss. This is where the Fed bridge loan facility will help.

Next week is all about the Fed. On Wednesday, it will announce any interest rate change. Many think that the best way for the Fed to calm the markets is not to raise rates. Higher rates mean more losses in bank portfolios, as well as other fixed income portfolios – including those of our clients. If the Fed does raise rates by 0.25%, they could say this is the last raise and then wait to see the impact of twelve months of steep increases. Economists say that the full impact of an interest rate increase is not felt for six months. Logically, the Fed could pause and see the economic result of what they have done.

A rate pause could be followed by a rate decrease this fall, triggering a strong rally in both fixed income and equities. Market analysts suggest that rates could come down both at the end of 2023 and the start of 2024. This is the way the year could play out if the Fed takes a leadership role. A downward trend in inflation is an essential part of this mix. Rates will come down at some point and securities values will be restored. The Fed controls the timing.

For the week, the S&P 500 was up +1.43% and the NASDAQ +4.41%, reassuring during this period of financial market stress. Monday the S&P 500 was -0.15%, Tuesday +1.65%, Wednesday -0.70%, Thursday +1.76%, and Friday -1.10%.

The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Investors should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All investors are strongly urged to consult with their tax advisors regarding any potential investment.

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