Weekly Market Update: The Bank that Knocked Down the Markets

Stock Market and Economy Roundup

After the Fed’s Chairman Jerome Powell signaled “higher for longer” rates at his Congress testimony, JP Morgan strategists warned that the S&P 500 may retest this cycle’s lows in the first half of this year, falling by up to 20%. However, some analysts remain bullish, predicting an upside of 20% for stocks this year. They base this forecast on their assumption that the Fed will succeed in cooling inflation. With this level of uncertainty, investors are advised to take precautions and base their decisions on trustworthy data and analysis.

U.S. Equities – Weekly Performance

Stocks wrapped up their worst week since June, after regulators closed the failing Silicon Valley Bank, aka the Bank of Startups. The collapse of SVB sparked fears of contagion into the broader banking sector; regional and smaller banks, which have less diversified sources of funding, took the biggest hit. The SPDR S&P Regional Banking ETF (KRE) registered its worst performance since 2020, falling 16% in the past week.

Although it is the biggest bank failure since 2008, SVB’s collapse doesn’t pose a systemic risk to the U.S. banking system: the bank was a niche financial institution catering almost exclusively to the VC & startup industry. However, the demise of the 18^th largest U.S. bank raises red flags with regards to a number of other banks that may face the same fate, as their business models and balance sheets are ill-prepared for a rising interest rate environment. Customers Bancorp (CUBI) fell 25%, First Republic Bank (FRC) lost 33% and Signature Bank (SBNY) tumbled 37% on the week.

Before the news of the SVB demise came around, markets were already spooked by the announcement of the  voluntary liquidation of Silvergate Bank, which served the same role in the crypto ecosystem as SVB did in the VC niche, by its parent company Silvergate Capital (SI). SI tumbled 54% on the week.  

The U.S. jobs report didn’t add to the prevailing negative sentiment, as stronger-than-expected job creation upheld bets for a 50 b.p. rate hike at this month’s Fed meeting. However, these bets were quickly reined in, as the turmoil in financials triggered worries of a banking crisis.

Major Economic Events of the Past Week

U.S.

February’s ADP Employment Change, which shows private sector job creation numbers, came in at 242K jobs, well above the 119K in January’s report and market forecasts of 200K.

Initial Jobless Claims for the week ending March 4^th came in at 211K versus the 195K expected.

February’s Unemployment Rate rose to 3.6% despite the expectations of no change from January’s 3.4%, the lowest in 54 years. Although Nonfarm Payrolls jumped 311K vs. the expectations of a 203K increase, an increase in Labor Force Participation Rate to 62.5% vs. January’s 62.4% led to an uptick in unemployment, because it indicates more people are looking for jobs. Average Hourly Earnings rose 4.6% year-on-year, compared with +4.4% in January. The Average Weekly Hours declined to 34.5 from last month’s 34.7.

Strong U.S. hiring data adds fuel to the anticipation of a much higher-than-previously-thought Fed terminal rates. These have jumped above 5.6% after Powell’s speech before Congress; with employment beating expectations we may as well move to 6% (given that the fall in bank stocks doesn’t translate into a banking crisis, which is currently not a feasible scenario). Higher interest rates don’t bode well for the stock markets, and especially weigh on more speculative growth stocks.

Eurozone

February Retail Sales missed estimates by a large margin, coming in at -2.3% year-on-year vs. +1.9% expected (0.3% month-on-month in vs. 1.0% expected). The weak retail sales numbers suggest continued hardship for European consumers amid stubbornly high prices.

Q4 2022 GDP was unchanged (0% growth) from the previous quarter, in line with expectations. Q4 GDP growth annualized was a negative -0.1%. A contraction in household spending and a sharp drop in corporate investment were the main reasons for stalling growth. Year-on-year, in Q4 the monetary bloc’s economy increased 1.8%, slightly less than initial estimates of a 1.9% rise. For the whole year 2022, GDP rose 3.5%.

Long-term inflation expectations have increased in almost all markets, but for the Eurozone this is an especially problematic issue, as the bloc’s consumers are extremely sensitive to inflation. So, as ECB chair Christine Lagarde has put it, the central bank must do more to tackle the “inflation monster.” The ECB has raised rates by 3% to a current level of 2.5%; financial markets are pricing in a jump of 4% later this year. While this level is quite low compared to other economies, the inherently weak Eurozone economy might not be able to sustain any positive growth under the strain.

Rest of the World

China’s February CPI grew 1% year on year, its slowest pace since February 2022, while the producer price index (PPI) fell by 1.4%. The weak inflation came as a surprise, as it stands out of line with the expected economic recovery following the nation’s exit from its zero-Covid restrictions. The recent inflation data suggests there’s no obstacle to more government stimulus to support the economy. However, the government’s GDP growth target of 5% for 2023, the lowest in decades, suggests the ruling party is taking a cautious stance and paying more attention to the facts on the ground, with the historic slump in housing market being one of the drivers of the economic downturn.

Stock Highlights of the Past Week

Crescent Energy Company (CRGY) reported for the fourth quarter and the full year 2022. CRGY’s revenues beat estimates in Q4, but EPS disappointed, coming in at just 0.18 vs. 0.60 expected. For the whole of 2022, total revenues surged, and net income turned positive from the previous year’s net loss.

Oracle (ORCL) reported mixed results for FY Q3 2023 (Q4 2022) as revenue missed expectations, while EPS came in at 1.22, slightly better than estimates of 1.20.

Our Star of the Week is Bj’s Wholesale Club Holdings (BJ), which capped a record quarter and a record year. Q4 2022 EPS was 1.0, beating estimates of 0.88. The company has been growing strongly over the past year; judging by the Q4 results and guidance, this trend will continue in the next quarters. The stock surged on the news, but then wiped out most of the gain, falling along with the broad market, and closed up 0.90% for the week.

This week’s most notable performer was General Electric (GE). The stock surged to its highest since 2018, jumping more than 8% on Thursday alone, after GE confirmed it will reach its own estimates for 2023 revenue, earnings, and free cash flow. Although the turmoil in the stock markets on Friday weighed on GE as well, the stock managed to log in a jump of 4.5%, in the best performance among S&P 500 companies this past week.

Upcoming Economic Calendar Events

This week we’ll receive a slew of very important economic reports on major markets.

The U.S. February CPI inflation, which will be reported on Tuesday, is expected to decline to 0.2% month-on-month and 6.2% year-on-year, versus January’s 0.5% and 6.4%, accordingly. If the numbers come down as expected, it would provide a signal that previous Fed rate hikes are bearing fruit, leaving room for a smaller hike in the next Fed’s meeting on March 21-22.

On Wednesday, we’ll get a glimpse of February’s Core Producer Prices (PPI) data, which is important as it serves as a leading indicator for the CPI, preceding consumer inflation by 1 to 3 months. The expectations are for a decrease to 5% from January’s 5.4%.

On the same day, we’ll learn whether the forecasts of a 0.1% monthly decline in February’s Retail Sales are correct. Sales surged 3% in January.

Finally, on Friday, we’ll receive a preliminary reading of the Michigan Consumer Sentiment Index for March. Economists project that the survey of personal consumer confidence in economic activity will show an increase to 67.5 from February’s 67.0.

Elsewhere, UK’s Unemployment rate for January is expected to remain unchanged at 3.7%. The European Central Bank (ECB) will hold its meeting on Thursday, after which it will release its decision on Eurozone interest rates.

Current and scheduled economic reports, Fed statements, and other releases, as well as their level of impact on stock markets, can be found on the TipRanks Economic Calendar.

Upcoming Earnings and Dividend Announcements

Companies releasing earnings reports this week include ZIM Integrated Shipping Services (ZIM), SentinelOne (S), Adobe (ADBE), BMW (BAMXF), FedEx (FDX), Dollar General (DG), and many more.

Companies’ reporting dates, consensus EPS forecasts and past data, together with their analyst ratings and price targets, can be found on the TipRanks Earnings Calendar.

This week’s Ex-Dividend dates are coming for the payouts of Teck Resources (TECK), Wesco International (WCC), Global Payments (GPN), HCA Healthcare (HCA), Crescent Energy (CRGY), and other dividend-paying firms.  

Companies’ Ex- and Payment dates, together with their analyst ratings and price targets, can be found on the TipRanks Dividend Calendar.

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