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The Inside Market

CAMS Weekly View from the Corner – Week ending 3/17/2023

March 20, 2023

To begin our previous edition we offered a general FYI type opening offering the topics shared would be but a scratch on the surface of all the data points and downstream analytical views that could be shared in light of the vast array of moving parts that have entered the general econ/market(s) landscape recently. We offer this today as it yet again applies and we sense could be a standing banner type opening for the foreseeable future. While there is a wealth of additional considerations, at the same time, underneath all of the noise it comes down to the central issue we have been banging on for two years now – price inflation! If you could magically whisk that away while also having the economic backdrop remaining healthy many other noise related issues would disappear. Reading a touch deeper into that magical backdrop such a backdrop has been the general narrative that we have pointed to countless times in light of it being a notable driver of markets since latter October. That is, price inflation is a non-issue on a forward looking basis and with this the Fed will not have to raise rates much more (think back months now) and will be cutting rates soon allowing for a “no harm no foul” type of economic storyline where the broad economy rolls on nicely and markets respond to the upside. Very importantly, said narrative seemingly grew in conviction even as there was a plethora of on-going and incoming data pointing to the opposite. Much like buildings that lack structural integrity narratives lacking solid underpinnings find a way to crumble to the ground. Suddenly said narrative seems to be crumbling rapidly if we are reading general sentiment correctly. Now there seems to be a building view that price inflation will not go away without a recession and maybe a deep recession to truly take it out. Interestingly, dating back to the 1950’s we have never had a notable price inflation issue without it leading to recession. Some food for thought. Did Yellen Really Say That Out Loud? Last Thursday sitting Secretary of the Treasury Janet Yellen testified before a Senate Finance Committee hearing on the proposed budget request for fiscal year 2024. Upon taking questions the bank bailout topic was raised via questioning from Senators on the Committee. The general gist boiled down to uninsured deposits and whether any bank failures going forward would also be treated the same as the uninsured deposits of Silicon Valley Bank SVB. Per her view, only to the degree said deposits would offer systemic risk to the financial system. This immediately elicits “too big to fail” type banks and potentially places smaller banks at risk of deposit flight relative to their much larger competitors. Below is a chart meant to monitor collective market participants take on the risk of such flight and its potential of occurring. The validity of the relationship offered is based from the perspective that if they become very concerned of such a reality unfolding it will show up in how they price very large banks relative to how they price small banks.

Click For Larger View:  https://schrts.co/SnuFTshV

Above is a decade and a half of large banks to small banks market pricing.  The left part of the chart depicts the 2008/09 housing debacle and all that unfolded through it.  Large banks were decimated in their market pricing relative to small banks (as the chart crashed hard south) being they had exponentially larger levels of exposure to said debacle.  Our blue line depicts a more typical relationship where there is some ebb and flow but essentially the relationship remains even-keeled. If the far right part of the chart moves rapidly upward from here market participants will be messaging “we fear too big to fail banks are the only banks that will be spared from deposit flight.” This is meant as a working chart in that it will aid in monitoring the storyline as near-term time unfolds.  If interested, clicking the link under the chart will give an on-going updated version. Deep Inside the Stock Market The stock market has begun to send diverging messaging within it.         We have a wealth of in-house tools designed to monitor, dissect and encapsulate the collective market participant messaging left in the wake of their market operations.  In the previous two weeks or so we have begun to see a message that offers concerns looking down the timeline. The short of it is deep inside the stock market the pricing is far more damaging and concerning than what is being seen surface level.  Historically, unless righted somewhat quickly, this often leads to stock market issues whereby even the surface level measures register notable problems. In an attempt to depict a complicated process in an easy to digest view we offer the chart below.

Click For Larger View:  https://schrts.co/umGINTBr

The above chart reflects the percentage return as 2023 has unfolded for the well recognized S&P 500, which is a weighted index, along with the equal weighted version of the S&P 500.  In the traditional S&P 500 Index certain stocks are given higher weightings in the construction of the index and with this said stocks can have a larger impact on how the index acts in its performance.  The equal weighted version simply gives all 500 companies the same weight and hence they all have the same impact. Our horizontal arrow highlights how these two versions of the S&P 500 went in completely different directions recently.  While the weighted version went upward the equal weighted version went south.  Currently they are mirror images of each other as the equal weighted version is negative 2 ½% while the weighted version is positive 2 ½%. This is a succinct attempt at depicting a much deeper and more damaging storyline that is taking place inside the stock market.  These types of behaviors can continue with an unknown expiration date but when they appear and do not right themselves relatively quickly they offer a high probability of overall stock market issues down the timeline.  Inside the stock market the messaging is showing concerning developing behaviors that we have not seen since the latter summer and early fall season of 2021.  This was before the narrative began to develop in earnest in latter October that essentially the Fed’s got this and there is little to worry about down the timeline.   As offered above, a narrative that is crumbling rapidly.  Interestingly, inside the stock market evidence is building rapidly that market participants are giving up on said narrative as well.  More food for thought. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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