Digesting the Quagmire – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

A Roller-Coaster Week…fueled by three, possibly four bank failures, kept the market off balance, finishing Friday on a negative note. Gold and bonds took center stage as investors and traders looked again for safer havens amidst the bank crisis. Gold bumped up to $1,969.80, a high for the year and bonds were heavy buys. The University of Michigan released its Consumer Sentiment Index for March data on Friday indicating consumer confidence declines in March, the first drop in four months. The report is three prolonged; the consumer’s own financial condition, their thoughts on the general economy recently, and long term thoughts. After hitting a month high of 66.9 in February of 2023, it has fallen to a low of 63.4 for March. It is a respected analysis of consumer habits and their feelings on the general economy. The Sunday news of the UBS and Credit Suisse debacle has set the stage for the upcoming week with all the financial puzzles. Markets were mixed on Monday and Tuesday, with the Dow Jones Industrial Average settling down 383 points on Tuesdays closing. Janet Yellon’s remarks gave investors a positive boost, saying that the government is ‘ready to stand fast with guarantees if the present situation worsens.’ Mr. Powell noted, ”Depositors should assume their deposits are safe.” As attention focuses (on Wednesday) on the Fed meeting and the results thereof, the market turned somber awaiting the 0.25 or 0.50 rate hike. As Wall Street contemplated the ‘can’t win’ situation for Mr. Powell (although he seemed just fine raising), he did raise the rate up 0.25%, surprising some who had thought the banking crisis would ‘stall’ an increase. Mr Powell reiterated again that rate hikes will continue as long as necessary to contain and drop inflation to the 2% range. He has held the course. After the ‘profound’ announcement, stocks dived later Wednesday. All indices turned negative, with all off 1.6% at close. The anticipated report ‘held the market hostage’ as many had hoped for no hike, thinking that bank turmoil was enough to deal with.

As trading resumed on Wednesday nearly all financial stocks including stalwarts JPMorgan Chase and Bank of America, along with smaller regional banks all finished lower. The fallout is taking more time and affecting all banks across the board. The bond markets slid as yields dropped with the 10-year Treasury and the two-year falling 3.4% and 3.9% respectively. Since the 1st of February interest in bonds has picked up steam as the more conservative investor looks to conserve capital.

All three indices showed slight gains by Thursday’s close. Banks In general were still reeling from the four failures with a majority falling over 6%. Economists and analysts have commented that bank pressures will affect market trends for some time.

Watch Out for Wheat…As Expectations grow that a major drought will occur this spring and early summer, shortages will drive wheat prices ‘skyward,’ possibly up 20%. “Drought will return and hurt spring wheat, not only in the U.S. but other places,” said Shawn Hackett, president of Hackett Financial Advisors in Boca Raton, Florida. The major disruptions are the war in Ukraine and the Russian (sanctions), two of the largest wheat producers in the world. Unable to sustain harvest production in the past year, and with possible drought conditions coming this year, it most certainly will bring about higher wheat prices. With present day prices in the $8.78 per bushel, Hackett suggests major increases by early summer.

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Randall W. Forsyth, Writer of “UP & DOWN WALL STREET” Barron’s “The hasty and aggressive responses by government, regulators, and the biggest banks staunch the bleeding resulting from the market’s loss of confidence in many medium-size and smaller banking institutions. That should allow the Federal Reserve to stay the course to raise its key policy interest rate again at this coming week’s much-anticipated meeting.”

Larry Fink, CEO of Blackrock, on the banking turmoil, in his annual letter, Barron’s “The price of easy money–are the dominoes starting to fall.”

Thomas Simons, an economist with Jefferies, Barron’s “The thing that is still true here, even though we have a lot of news coming in, is that inflation is still very much rooted in these sticky service sector categories that are just really tough to stamp out,” says Mr. Simons. “If the Fed were to pause here, I’m very concerned inflation expectations would take off highly once again.”

Mary Callahan, Endoes, CEO, JPMorgan Chase Wealth Management, Barron’s “The U.S. economy is still healthy, and that hasn’t changed because of two regional bank seizures.”