Exam Season

Aoifinn Devitt – Chief Investment Officer

It was a week that saw great pomp and fanfare across the Atlantic as the official coronation of King Charles III took place in the UK. On this side of the Atlantic, the week was rather more mundane as markets wrestled with the “exam question” of how to handle contradictory data points. It is somewhat like the multiple-choice questions that are set up with two questions built into one – is the answer: A but not B, B but not A, neither A nor B, or both A and B?  The examiner has craftily combined two bits of knowledge into one question, and finding the right answer requires twice the knowledge.

Markets feel similar today.  It is not enough merely to look at the direction hinted at by the Fed in its decision making, which was the study for last week. It is also important to know the sometimes contradictory data in the form of ebullient employment data (253,000 jobs added in April) and the fact that 79% of S&P 500 companies have reported a positive EPS surprise in the last quarter. These data points might send us in opposite directions in terms of forecasting the path of the economy for the rest of the year.

Markets have been flat over recent days, but the persistently strong momentum around tech stocks has lifted the Nasdaq out of its official “bear market”:

Source: Morningstar as of 05/09/23

Whether or not to trust banks and regional banks in particular is another exam question, probably one demanding a long form response in this case.  On the one hand, we have reassurances from the swift action taken by regulators and JP Morgan to absorb the flailing First Republic Bank.  On the other hand, we have stern warnings from the Fed produced this week that suggest that the recent bank failures will lead to tighter lending standards and falling asset prices.

Other commentators have used evocative imagery such as a “Bank Walk” as opposed to a “Bank Run” to depict the steady but orderly departure away from banks as deposit institutions as other instruments such as short-term bond funds present more compelling returns.  Another one is the “Credit Squeeze”, a term used by Austan Goolsbee, president of the Federal Reserve Bank of Chicago, as opposed to a credit crunch. To him, that pointed to protracted woes in commercial real estate lending in particular, as well as a higher likelihood of a recession.

As you may surmise, exams are on my mind this week.  Good luck to all exam-takers and graduates.

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