Rates are rising. Banks are failing. And, believe it or not, the
could still hit 4600.
Yes, that sounds ridiculous. The
Dow Jones Industrial Average,
after all, has dropped 4.6% this week, while the S&P 500 fell 4.5%, to 3857, and the
The losses were spurred first by comments made by Federal Reserve Chairman Jerome Powell in testimony before the Senate. There, he said that inflation is too strong and rates would need to go higher than the market is expecting, sending chances of a half-point interest-rate hike to more than 80%. Then,
Group (ticker: SIVB), the parent of Silicon Valley Bank, told investors that it was forced to sell securities at a loss because of dwindling deposits, sending the stock down more than 60%—and it took the rest of the banking sector with it. By midday Friday, Silicon Valley Bank had been shuttered.
Investors have been waiting for something to break, and the collapse of SVB might be the first sign that things are breaking. The fear is that other banks have similar issues, which is why the
SPDR S&P Bank
exchange-traded fund (KBE) has dropped 17% this week. And if the Fed decides it needs to keep aggressively raising interest rates—the CME FedWatch Tool now says it’s basically a coin flip whether rates go up a quarter or half a point at this month’s meeting—that’s likely what will happen.
But it doesn’t have to play out that way. This past Friday’s payrolls report showed signs of a cooling job market despite a headline number that showed 311,000 jobs had been created. The unemployment rate, for instance, rose to 3.6%, while wages grew at a slower-than-expected 0.2%. And the problems in the banking sector could make the Fed less likely to move rates firmly higher, not more.
“The bank’s woes may convince Fed officials to at least slow the pace of tightening,” writes Ed Yardeni, president of Yardeni Research. “[Monetary] policy is already sufficiently restrictive to engineer a soft landing and continued disinflation.”
And a soft landing—the idea that the Fed can reduce inflation without sending the economy into a deep recession—is exactly what the stock market pines for. The payrolls data shows that it may be closer to reality than investors give it credit for. If a recession is avoided, history suggests that 4600 is a reasonable target for the S&P 500—even if earnings were to decline year over year, which is highly plausible.
In years with no recession but when S&P 500 earnings have been declining, the index gained 17% on average, according to Evercore data, with some years offering even better gains. In 1998, for instance, a year of high volatility, the index gained 27%. The midpoint of those moves, 22%, would land the S&P 500 at just over 4600 by year end.
“A ‘Soft Landing’ playbook would suggest equity upside,” writes Julian Emanuel, chief equity and derivative strategist at Evercore.
Is it too much to hope for? Wishful thinking? Something akin to an ostrich sticking its head in the sand? Perhaps. But fear often has a way of turning into, well, something else.
“Once the fear is gone, greed can really push this market higher,” Yardeni says. “I’ve got no problem with 4600 by the end of the year.”
We can keep hoping.
Write to Jacob Sonenshine at firstname.lastname@example.org
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