Can The Fed Engineer A Soft Landing?

March 29, 2023
Weekly Market Outlook
By Keith Schneider and Donn Goodman

Last week was filled with market fireworks, and investors were left to contend with a powder keg that may not go away and could lead to counterintuitive market moves.

Despite epic bond market volatility, equity markets reacted with diverging returns, increasing the media’s chatter around the recurring question, “Is the Fed Ready to Pivot?”

At MarketGauge, however, we’re more focused on the question, “What’s the key to successful investment positioning regardless of what the Fed does next?”

Unfortunately, we can’t ignore the Fed.

As we’d been steadfast in predicting, last week the Fed raised rates by 25 basis points after their FOMC meeting.

There were NO Fed Governors calling for a pause and no indication that there would be interest rate cuts anytime in 2023, so we got what we expected.

However, Chairman Powell’s news conference that followed the rate decision was rather dovish, and speeches by Treasury Secretary Janet Yellen rattled the stock market as it broke below widely followed technical levels.

The Fed’s actions, combined with a persistent banking crisis, leaves the market concerned with a powder keg of market moving ammunition that may not go away.

The center of the market’s concern last week was bank deposits. More specifically – the level of uninsured bank deposits and how the Fed and the Treasury “feel” about them. These, of course, are the regulatory hot potato in the current banking crisis.

As you’ll see in this week’s expanded Market Outlook, Ed Yardeni’s research shows the magnitude of the problem with charts highlighting the rapid growth and the historic absolute and relative levels of uninsured vs. insured deposits at FDIC institutions.

The large number of uninsured deposits and declining confidence in the banking system’s liquidity kept the market on edge and world leaders speaking out to boost consumer and investors’ confidence.

Here are what a few world leaders said over the past week:

  1. President Biden: “Our banking system is safe”
  2. Treasury Secretary Yellen: “U.S. banking system is sound”
  3. Fed Chairman Powell: “Banking system is strong”
  4. Swiss National Bank: “Problems of U.S. banks do not pose a risk of contagion for Swiss financial markets”
  5. And more. (click here for a more complete list) 

While leaders have been talking down the problem, investors have been reacting differently to the problem.

Matt Cerminara from Fundstrat pointed out with the help of an ominous chart below of ICI Money Market Fund Assets that over the last two weeks, investors have recently raised $238 billion in cash. This is more than double any 2-week period during the 2008-09 crisis.

According to Matt, this is a lot of “powder,” or in his words, “buying power.”

Of course, investors don’t raise cash because they’re bullish, and the obvious problems of inflation, higher interest rates, future economic growth, etc. aren’t going away any time soon.

Click here to continue reading the expanded Market Outlook for how to position your investments and watch the video analysis of the market’s technical condition.

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