Weekly Notes (March 27)
March 27, 2023
- Bumped Up
A bumpy ride on Wall Street ended last week with stocks higher as investors attempted to price in lingering banking system concerns balanced by a higher likelihood that the Fed pauses rate hikes sooner than previously expected. The S&P 500 gained 1.4%, bringing its year-to-date return to 3.4%, and the Nasdaq Composite rose 1.7%, boosting its year-to-date gain to 13.0%.[i]
2. Off-Peak Fears
Market volatility, as measured by the Cboe Volatility Index®, spiked as high as 26.52 in the week following Silicon Valley Bank’s (SVB) collapse, which is about 35% above its long-term average but about -70% below its peaks in 2020 during the onset of the pandemic and in 2008 during the Global Financial Crisis. It ended last week only about 10% higher than its long-term average.[ii]
3.Unrealized Potential
In the wake of SVB’s collapse, economists analyzed U.S. banks’ overall exposure to the sharp rise in interest rates over the last year and found the following: The U.S. banking system’s market value of assets is $2 trillion lower than suggested by its book value of assets as of 1Q23; 10% of banks have lower capitalization and larger unrecognized losses than those at SVB; and, on the other hand, only 1% of banks had higher uninsured leverage (uninsured debt/assets) than SVB.[iii]
4. Attention-Grabbing Commercials
A record amount of commercial mortgages held by banks (about $270 billion) expire in 2023, compounding investors concerns about banks’ unrealized losses. Smaller banks hold around $2.3 trillion in commercial real estate (CRE) debt, which is almost 80% of the total held by all banks.[iv] According to Trepp, which provides insights and technology to the CRE and banking markets, metropolitan areas with the riskiest office loans held by banks are San Francisco, Washington D.C., and New York.[v]
5. More for Less
The median price for existing homes fell year-over-year (y/y) in February for the first time since 2012, and the number of existing homes sold rose 14.5% month-over-month (although fell -22.6% y/y) after decreasing each of the prior 12 months.[vi] Sales during this period were likely boosted by a 1% drop in the average 30-year fixed mortgage rate from a November high of around 7% to a February low of about 6%.[vii]
6. Cracking Eggflation
After 10 months of producer prices for eggs rising at least 120.2% y/y (they rose 280.9% y/y in November), prices rose by only 64.3% y/y in February. Milk prices fell -13.3% y/y after rising by as much as 48.9% y/y last year.[viii] The dramatic rise in egg prices stems from the deadliest avian flu outbreak in history last year,[ix] and higher input costs (e.g., energy and labor costs) drove milk prices higher.[x]
7. Digital Gold
As of last week, the price of Bitcoin had climbed about 70% year-to-date and about 40% over the past two weeks since the banking crisis began,[xi] causing some proponents to argue that it’s a “digital gold,” — a “safe haven” substitute to the traditional banking system. According to the JPMorgan Chase Institute, American crypto ownership surged from just 3% before 2020 to 13% by June 2022.[xii]
8. Un-manning the Line
Durable goods manufacturing is among the industries facing the highest labor shortage. Even if every unemployed person with experience in the industry were employed, the sector would fill only 44% of its vacant jobs. The manufacturing industry lost about 1.4 million jobs at the onset of the pandemic and as of January 2023 had 803,000 job openings.[xiii]
9. Game On
Globally, consumers are expected to spend $185 billion on video games this year, five times what they will spend at movie theaters and 70% more than what they will spend on streaming services like Netflix. Gamers in their 30s and 40s now outnumber those in their teens and 20s.[xiv
10. Northern Light and Southern Might
Last week, a geomagnetic storm — rated four out of five by the National Oceanic and Atmospheric Administration (NOAA) — brought vibrant auroras as far south as Arizona, New Mexico and North Carolina. Scientists expect aurora activity to increase over the next few years as the sun enters a period of high activity.[xv] And in other news of brilliant, unexpected events, the No. 9 seed Florida Atlantic Owls (FAU) will head to the March Madness Final Four, an outcome predicted by only .07% of ESPN brackets.[xvi]
References:
[i] FactSet total returns as of March 24, 2023.
[ii] Cboe, data from January 2, 1990 through March 24, 2023, Historical Data for Cboe VIX® Index, https://www.cboe.com/tradable_products/vix/vix_historical_data/. Accessed March 27, 2023. The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX℠) call and put options, and other volatility indices.
[iii] Jiang, Erica Xuewei, Gregor Matvos, Tomasz Piskorski, and Amit Seru, “Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?” March 13, 2023, https://ssrn.com/abstract=4387676. Accessed March 27, 2023.
[iv] Grant, Peter and Konrad Putzier, “Commercial Property Debt Creates More Bank Worries,” The Wall Street Journal, March 21, 2023.
[v] Buschbom, Stephen, “Bank CRE Office Loans: Which Metro Areas Across the U.S. are Most at Risk?” Trepp, https://www.trepp.com/trepptalk/bank-office-loans-which-metros-are-most-at-risk. Accessed March 27, 2023.
[vi] Friedman, Nicole, “Home Prices Fell in February for First Time in 11 Years,” The Wall Street Journal, March 21, 2023.
[vii] Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MORTGAGE30US. Accessed March 27, 2023.
[viii] Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, “Eggflation rate lower, milk prices decrease, in February 2023,” https://www.bls.gov/opub/ted/2023/eggflation-rate-lower-milk-prices-decrease-in-february-2023.htm. Accessed March 27, 2023.
[ix] Ikeda, Emilie and Katie Jackson, “Why Are Egg Prices So High Right Now?” January 12, 2023, https://www.today.com/food/groceries/why-are-eggs-so-expensive-rcna65558. Accessed March 27, 2023.
[x] Adams, Christina, Ludovic Meilhac, Kate Toews, and Roberto Uchoa, “Top priorities for dairy executives in 2023,” McKinsey & Company, March 27, 2023, https://www.mckinsey.com/industries/agriculture/our-insights/top-priorities-for-dairy-executives-in-2023. Accessed March 27, 2023.
[xi] CoinMarketCap, as of March 24, 2023, https://coinmarketcap.com/currencies/bitcoin/. Accessed March 24, 2023.
[xii] Wheat, Chris, “Crypto Ownership Surges, New JPMorgan Chase Research Reveals,” JPMorgan Wealth Management, https://www.chase.com/personal/investments/learning-and-insights/article/crypto-ownership-surges-new-jpmorgan-chase-research-reveals. Accessed March 24, 2023.
[xiii] Ferguson, Stephanie, “Understanding America’s Labor Shortage: The Most Impacted Industries,” U.S. Chamber of Commerce, March 23, 2013, https://www.uschamber.com/workforce/understanding-americas-labor-shortage-the-most-impacted-industries. Accessed March 27, 2023.
[xiv] The Economist, “Storm Forming,” March 25, 2023.
[xv] Patel, Kasha, “Auroras Shine Unusually Far South Amid Strongest Solar Storm Since 2017,” The Washington Post, March 24, 2023, https://www.washingtonpost.com/climate-environment/2023/03/24/northern-lights-aurora-us-virginia/. Accessed March 27, 2023.
[xvi] Ricks, William, E., “March Madness 2023: Stats and Reactions After FAU’s Upset Win,” ESPN, March 25, 2023, https://www.espn.com/mens-college-basketball/story/_/id/35949605/ncaa-tournament-florida-atlantic-owls-kansas-state-wildcats-twitter. Accessed March 27, 2023.
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