Interest Rates Continue to Lead the Conversation: Market Commentary from Cabana’s CEO – April 21, 2023

1 year ago

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The stock market remains rangebound and indecisive heading into the next meeting of the Federal Reserve, which begins on May 2. The policy statement and interest rate determination will occur the following afternoon. Most analysts are predicting another 25-basis point hike, bringing the Fed funds rate to 5-5.25%. It is astonishing to think only a year ago the rate was 0-.25%. The pace and relative jump in interest rates is unprecedented and continues to pose ever-increasing risks to the financial system and the economy. Imminent recession is being proclaimed by “talking heads” and so-called “smart money” everywhere.  

Banks are expected to reduce lending (credit) as their balance sheets are squeezed and their ability to make money fades. We have discussed the effects of the inverted yield curve on the financial sector many times. Simply put, banks have a hard time making money when short term rates are higher than long term rates. Every time the Fed hikes, short term rates go up and long-term rates fall as prospects for a slowing economy rise. It becomes a self-fulfilling prophecy. Add to this the fact that the general public has gotten wise to the reality that banks are not paying fair rates on deposits and are moving their money out of bank checking and savings accounts into custodial money market accounts and U.S. Treasuries paying three or four times as much (or even more). We have been helping our Cabana clients do just this over the past six months and we are not the only ones. This interest rate rocket ship we are on made it very difficult last year for asset managers like us to hedge with bond and fixed income assets. Now we are seeing these same issues show up in the banks. Commercial real estate is also in a world of hurt as they are dealing with unoccupied property and will shortly have to re-finance at much higher rates.  

Yet the stock market stays put, neither breaking to the upside nor breaking to the downside. Since bouncing off the October low, the S&P 500 has gyrated between 3900 and 4100 (with brief movement just above and just below). It seems that nobody is willing to invest in either direction. There is lots of trading going on, but I am not so sure about investing. The more investors are sure a recession is on the way and with it a corresponding drop in stocks, the less likely it is to happen. That’s just the way the market works and that is in my opinion why we see a stock market refusing to fall down. Ultimately, earnings will clear all this up one way or another. They always do. Right now, earnings are coming in fairly strong and suggest that the consumer is still out there spending. Inflation is falling or appears to have at least peaked. No more banks have failed in the fast few weeks. All positives, but it is the future that counts. Future earnings expectations are falling. 

We don’t have answers here beyond having a system. We won’t catch bottoms or tops and won’t try and outsmart anybody. What we will do is attempt to manage risk first and be there for when this market does turn to the positive, which it will. Between now and then we will pay attention to the good and the bad out there and stick to our discipline. We are investors not traders and are interested in where we stand five years from now. We won’t guess but rather respond objectively within our system (CARA). Investing requires patience and resolve and both of those are hard to master.  

At Cabana, we currently remain bearish but are prepared to add equity exposure.


January 17, 2024

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