U.S. stocks closed higher on Friday, 24th March 2023 reversing from a 1% selloff early in the day.
Bank stocks were the leaders as they recovered from the early selling and pulled the rest of the market up with them.
Janet Yellen, who leads the Financial Stability Oversight Council, released a statement on Friday assuring the public that although banks are facing some stress, the overall financial system is still sound.
Couple with the bond and swap markets calling for rate cuts as early as June, which provided further reassurance to investors, leading to a strong rally into the close.
For the week, the major stock market indexes all booked a winning week, with the Dow Jones average gaining 1.2%, the S&P 500 rising 1.4%, and the Nasdaq Composite closing up 1.7%.
Here are the closing levels on Friday, 24th March 2023:
Last week, the Federal Reserve raised rates by 25 basis points, with Jerome Powell stating that they are committed to fighting inflation and that rate cuts are not in the cards this year.
Despite this, the market rallied.
However, the stress in the banking sector seen recently could be a result of previous rate hikes taking effect in the economy, with a lag between hikes and economic reactions. This could lead to further stress in other parts of the economy and potentially result in a recession.
To add, the bond and swap markets are pricing in a recession, with rate cuts coming as early as June.
The market’s reaction to these developments is somewhat puzzling. Despite the Fed’s commitment to raising rates, the market seems to be disregarding this and rallying anyway. Furthermore, if the financial system is truly stable, would it not make sense for the Fed to continue raising rates? Conversely, if the bond and swap markets are predicting a recession and rate cuts, does this not indicate that the economy is in trouble?
It is difficult to fight irrational exuberance, as sellers have recently experienced.
The market is making all kinds of excuses to rally, despite what is actually in front of them.
Ultimately, it can be challenging to go against the market, even if it appears to be wrong.
Source: CBOE, Bloomberg
This commentary is written by James Gomes.
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
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