Home About Archives RSS Feed

@theMarket: Banks Bashed as Fed Continues to Raise Rates

By Bill SchmickiBerkshires columnist
The Federal Reserve Bank raised interest again, even as another regional bank saw its stock price collapse. Investors are asking when enough tightening is enough.
The key Fed funds interest rate was hiked by another 0.25  percent, which increased its benchmark rate to between 5 percent and 5.25 percent. That was the 10th hike in 14 months and has pushed interest rates to a 16-year high.
The stock market sold down after Chairman Jerome Powell made it clear (again) that fighting inflation is the Fed's number one objective. Powell did hold out some hope that this hike could be the last, although that decision, he said, would be data-dependent and be decided from meeting to meeting. Nothing he said was concrete enough for investors to truly believe that a pause in rate hikes is in the offing.
The bulls were hoping that the meeting would either result in no interest hike or be a one-and-done event. Neither occurred, which has ramifications for the economy, employment, and the ongoing regional banking crisis. The banks lead the market declines and well they should.
Beginning in March, with the collapse of Silicon Valley Bank, the markets realized that the rapid rise in interest rates had created both a danger for many banks and an investment opportunity for the public. Main Street could now buy high-yielding U.S. Treasury bills and CDs instead of keeping their money in checking and saving accounts with little to no returns. I have written extensively on the subject in my columns over the last several weeks.
As the Fed continues to raise interest rates, the yield on these alternative investments also rises. The yield on a three-month U.S. Treasury bill, for example, rose from 5.10 percent to 5.25 percent the day after the Fed's interest rate hike. This has had a serious detrimental impact on banks overall and regional banks as more and more investors pull their deposits.
But that is not all. The $5.7 trillion commercial real estate sector (CRE) is also in trouble. Thanks to high-interest rates, the Pandemic, and the subsequent trend toward working from home, many urban centers are facing a historically high vacancy rate. It is so bad that many cities are considering converting empty office buildings into living spaces.  This trend is spreading across the nation.
Smaller regional banks hold 4.4 times more exposure to the U.S. CRE than larger banks, according to a recent report from JPMorgan Private Bank. Citigroup also found that banks represent 54 percent of the overall CRE market, with small lenders holding 70 percent of CRE loans. Between the drain on deposits, and now the risks in real estate, is it any wonder that the regional bank index has lost 34 percent of its value over the last month?
Within hours after the Fed hiked rates on Wednesday afternoon, the regional bank, PacWest, reported that it was considering strategic options including a sale. The bank's stock tumbled 60 percent on Thursday and took the regional bank index and the stock market down with it. Gold, silver, and Bitcoin (all areas I have featured in the last few months) spiked higher in a rush for safety with spot gold hitting a high of $2,085.
As I said last week, where the market would finish the week would depend on the Fed's decision on interest rates. In hindsight, Chairman Powell had it right. The non-farm payroll data released on Friday showed that 253,000 jobs were added in April. The unemployment rate dropped to 3.4 percent, while the expectation was that the rate would rise to 3.6 percent.  The Fed wants to see job gains fall, but they are going the other way.
The Fed needs to see the unemployment rate closer to 4-4.5  percent percent to reach its inflation target of 2 percent. We are nowhere near that level, so to me, the Fed's stance on monetary policy seems vindicated.
So where does all this bearishness indicate to me? For me, I think the markets will bounce back next week. We may even break the range we have been in for almost a month. That is a contrarian call, since most traders are what I called "beared up."
I believe we can still see my target on the S&P 500 Index of 4,325 give or take a few points. After that, likely in the second half of the month, I believe we will see a substantial pullback. Precious metals, on the other hand, are likely to now see a bout of profit-taking after a spectacular run.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.  

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Pittsfield ZBA Grants Casella Permit for Waste Transfer Facility
GET LOUD: A Celebration of Banned Books
CHP Readying for New Covid-19 Vaccine Supply
Miss Adams Diner Auctioned Off for $80,000
North Adams Police Chief Says Body-Worn Cameras Beneficial
Berkshire County Historical Society Celebrates Plant a Tree Day
Saboteurs Earn Narrow Win in Northern Berkshire Fall Hoop League
Harrington Earns League Honor at Stonehill College
North Adams Holding Session on School Project Options
Lanesborough Planner Pays Penalty for Conflict-of-Interest Violation

@theMarket (459)
Independent Investor (451)
Retired Investor (161)
September 2023 (6)
September 2022 (2)
August 2023 (7)
July 2023 (7)
June 2023 (8)
May 2023 (8)
April 2023 (8)
March 2023 (8)
February 2023 (8)
January 2023 (6)
December 2022 (7)
November 2022 (7)
October 2022 (8)
Employment Stimulus Europe Debt Ceiling Crisis Metals Greece Stock Market Energy Fiscal Cliff Taxes Commodities Currency Jobs Stocks Rally Deficit Economy Recession Japan Banks Interest Rates Election Pullback Markets Debt Europe Selloff Oil Congress Federal Reserve Retirement Banking Bailout Euro
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Fed's 'Higher for Longer' Message Disappoints
The Retired Investor: Rescheduling Cannabis Could Boost Profits
@theMarket: Oil Prices Boost Inflation But Don't Deter Investors
The Retired Investor: Government Shutdown Scorecard
@theMarket: Rising Yields, Oil & Dollar Too Much for Stock Market
The Retired Investor: Working Mothers Hit Prepandemic High
The Retired Investor: Re-Starting the Space Race
@themarket: Markets in a Topping Process
The Retired Investor: Automobile Becoming a Luxury Item
@theMarket: Bond Yields Up, Stocks Down