Charts of the Month - April

Charts and themes that tell the current story in markets and investing…

Bank Failures

The banking system has taken center stage in recent months, which is never a good thing. Three of the four largest bank failures in American history happened since March 10^th .

With the most recent failure of First Republic, we’ve now seen three banks fail with combined assets of more than $600 billion. That’s significantly higher than the combined assets of the 511 banks that failed from 2009 through 2022. And it’s a record for a calendar year, surpassing the prior high in 2008.

Only a year ago First Republic was a top 20 U.S. bank by assets with a sterling reputation for customer service and an enviable roster of high-net worth clients. But like Silicon Valley Bank, they were primarily concentrated in technology customers. They opened branches in places like Facebook’s headquarters and offered mortgage loans to the likes of Mark Zuckerberg at well-below market rates.

It was a great business, until it wasn’t. Deposits declined by more than $100 billion over the most recent quarter, an unprecedented bank run.

J.P. Morgan, a perceived “white knight” in 2008 buying Washington Mutual and Bear Sterns, dusted off their old playbook and purchased First Republic from government receivership.

On a call highlighting the details of the First Republic acquisition, J.P. Morgan CEO Dimon said:

“No crystal ball is perfect. But I think the banking system is very stable. There are only so many banks that are offside (in the same way First Republic was). There may be another smaller one, but this pretty much resolves them all. This part of the crisis is over.”

Market Shrugging Off Bank Troubles

Since March 10^th —the date of the first bank collapse—many might be surprised to see the market has charted an upward course.

While the regional bank index is down ~20% since SVB collapsed, the S&P is up more than 6%, and even more surprising the financial sector roughly flat. The market has been very resilient, indicating—at least for now—the problem resides with a few banks rather than system as whole.

The “fear index,” or the VIX, reflects that. At 15.8, the VIX is below its long-term average and well below any recent peaks observed at past points of hysteria.  

Equity investors are often sarcastically referred to as “hopeless optimist” in the eyes of fixed income investors. In theory, equity investors are often focused on long-term growth, while fixed income investors are focused on getting their money back in shorter time frames.

Looking at the MOVE index, or “the VIX of the bond market,” there was an initial spike when Silicon Valley Bank failed, potentially signaling more problems were looming. But in the weeks that followed, the index has retreated from those highs, possibly reflecting normalization.  

Last Fed Hike?

The Fed hiked rates for the 10^th time since March 2022 today. The federal funds rate is now 5.00-5.25%, its highest level since September 2007.

However, markets are always more interested in what might happen in the future rather than what happened most recently.

The fed futures market—measured by CME—is currently pricing in an ~80% chance the Fed pauses rate hikes at their next meeting in June.

It’s possible May could be the last rate hike of this cycle. While far from certain, fed funds futures are going as far as pricing in a a rate-cutting cycle starting later this year.

This could be welcome news for investors. Looking at the last ten times the Fed did their “last hike,” the S&P 500 was positive a year later 80% of the time and up more than 14% on average.

Curious Case of the Labor Market

Despite endless talk of recession, the labor market is telling a different story. Debatably, among the strongest ever—the U.S. unemployment rate is currently 3.5%, a historically low level with data going back nearly 70 years.

While the headline line number is strong, there are interesting trends bubbling under the surface.

Jim Fish—CEO of Waste Management, the largest garbage disposal business in the U.S.—recently described the labor market as upside-down, observing:

“We can’t hire a truck driver to drive a trash truck for $90,000 in Houston, Texas, but I can hire an M.B.A. from a small school for $60,000, and I can get them all day long.”

He added:

“The world seems to have flipped on its head.”

Despite headlines around layoffs, the total number of job openings in the U.S. remains near record highs—nearly 10 million openings—and the number of people voluntarily quitting jobs also near record highs. 

Historically, the median time it takes from the start of a Fed hiking cycle to see an increase in the unemployment rate is about 14 months. So, it’s possible—maybe even likely—we see the unemployment rate increase in the months ahead.

But for now, the labor market remains very tight.