Bank chaos tests traders’ nerves and rewards those doing nothing

More sustained USD losses, Scotiabank

Recently, market narrative twists have become captivating. There has been a strong desire to respond. Most of the time, doing so was a mistake.

It’s still early, and when financial hardship is present, things can change quickly. Although there have been predictions of a banking catastrophe, a credit-fomented recession, pivoting central banks, and stagflation, the best course of action so far has been to remain still, particularly in the stock market.

Although Treasuries have inflicted severe blows to short sellers, the S&P 500 recently finished its second straight week of gains. Had investors held on during the worst volatility in forty years, they would have made big gains.

The common investment advise of closing your ears to cacophony is frequently proven to be true. According to April LaRusse, director of investment specialists at Insight Investments, “Panicking never pays.” When there is a lot of ambiguity, it is best to take your time, gather facts, and do an analysis rather than rushing to make significant adjustments.

It now takes near-heroic poise to obey it. A “no landing” scenario, in which growth continues while central banks continue to enforce restrictive policy, has changed from the main market theme in recent weeks to a variety of other scenarios, including banking instability, a recession, and some sort of Fed-fueled revival in technology shares.

In reference to a statement by Vladimir Lenin, Marko Kolanovic, chief global markets strategist at JPMorgan Chase & Co., said in a note that “There are decades where nothing occurs; and there are weeks where decades happen.”

Bulls are currently taking advantage of the share market’s resilience, encouraged by expectations that the Federal Reserve would soon halt its zealous fight against inflation and that authorities, notably Treasury Secretary Janet Yellen, will be able to control any negative financial effects. The S&P 500 gained 1.4% during the course of five days, virtually making up for the loss it suffered the day before regional banks’ collapse two weeks ago. For the third week in a row, the Nasdaq 100 increased, and it is already 5% above its pre-crisis level.

The Lehman Brothers collapse caused significant turbulence in 2008, yet stock indexes nevertheless managed to close the next week essentially flat. Bears are keen to point this out. Stocks currently trade closer to their lows than to their highs from the previous year, when a 25% decline in the S&P 500 clearly signalled the beginning of a recession. A lot of suffering is already factored into the price of stocks. But it was also true when the worst part of the previous crisis began.

To be sure, nobody, not even Fed policymakers, has a solid opinion on how the banking turbulence will affect things. Although practically everyone, including Fed Chair Jerome Powell, anticipates that the crisis will lead to a tightening of financial conditions, agreement on the precise extent of harm is lacking. Estimates for how much the lending crisis has affected monetary policy range from 50 basis points to 150 basis points in rate increases, among other attempts to quantify the effect.

The same holds true for attempting to determine the impact on recognised economic indicators. Citing statistics on credit card spending from the company, analysts at Citigroup Inc. claim that the banking crisis is already reducing consumer demand. In contrast, according to separate assessments from their economists, card users at JPMorgan and Bank of America Corp. have continued to grow.

According to George Cipolloni, portfolio manager at Penn Mutual Asset Management, “The Fed has upped the temperature, the water is starting to boil, and we are starting to see some frogs start to die.” “There is the possibility for further bank failures in this cycle as long as the Fed maintains that temperature at a specific level. And that’s one of the explanations for Yellen’s and some other people’s actions in terms of deposit guarantees.

Although differing viewpoints are a common occurrence in the investment world, they have rarely been this extreme. The difference between the highest and lowest year-end targets for the S&P 500 in the equity market is 47%, which is the most at this time of year in two decades, according to data gathered by Bloomberg.

Fixed income also exhibits conflict. Bond traders maintained their bets that the central bank will change direction this year despite Powell’s insistence on Wednesday that rate reduction are not his “basic case.” By year’s end, swap rates associated with policy meeting dates predict reductions totaling around one percentage point.

An almost unheard-of period of instability in government bond prices has been supported by constantly shifting perspectives on the economy and Fed. Until Thursday, two-year Treasury rates rose more than 10 basis points for an additional session, a sequence of exaggerated swings not seen since 1981. Seven of these sessions saw gains and four saw losses, hurting both bulls and bears.

The dominance of cash-rich tech megacaps has made the Nasdaq 100 stand out as one of the best-performing assets this year amid all the chaos and volatility. Although the index has increased by approximately 17%, the journey there has been nauseating. Missing the best five days would have only resulted in a 1% gain for investors, proving the painful consequences of poor timing. The Nasdaq 100 would be up 28% for the year thus far if the worst five days were excluded.

According to Research Affiliates’ Que Nguyen, chief investment officer of equities strategies, investors should be ready for a rough ride.

Most of the time, she added, when you have a debt or liquidity issue, it takes more than two weeks to resolve. “When things are over, the markets are stable. The fact that there is still such extreme volatility suggests to me that things haven’t completely ended.