Two the Point — Even a Crystal Ball Wouldn’t Help – Part 2

About a year ago, we discussed the idea that even if you had knowledge of an event before it occurred, the market reaction is often a surprise. For this reason, our investment process relies more on thoughtful portfolio diversification and portfolio construction than it does on predicting the future.

The latest turmoil in the banking industry is yet another example of a major market event not being met with the reaction most would have expected. The failure of Silicon Valley bank began cascading through markets on March 9, 2023. If one had a crystal ball, one likely would have expected the S&P 500 to be far lower two weeks later. The reality, however, is that the S&P 500 is slightly higher as of March 22. Predicting future events is hard. Predicting the market’s reaction to those events can be even harder.

In our view, the cause of the counterintuitive market reaction is the result of increasing expectations for a pause in interest rate increases by the Federal Reserve. Taking that one step further, the market is now pricing in multiple rate cuts by the end of the year.

As we have warned many times, be careful what you wish for when it comes to rate cuts. Chris Verrone of Strategas Research Partners put it perfectly last week when saying, “we’ve sensed in meetings over recent days that investors are eager for a pause from the Fed…as it may hasten the time before an eventual cut.  Historically, the pause has been [temporarily] bullish while the cuts have been bearish.”

 
Source: FactSet; Bryn Mawr Capital Management
 

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