I heard from folks left and right this past weekend after the failures of Silicon Valley Bank and Signature Bankin New York.
These came on the heels of Silvergate Bank, a crypto-focused bank that closed its doors last week.
Silicon Valley Bank’s U.K. division was sold to HSBC Holdings (HSBC) for… are you ready?… one British pound. Or $1.22 if you’re keeping score in dollars.
Folks were scared and wondering what it all meant. And I get it.
From a financial standpoint, it doesn’t get more dramatic or anxiety-producing than having your money in a bank and finding out that bank has gone under. Some of the more iconic financial images of the past century are people waiting outside bank doors during the Great Depression hoping against all hope to get their hands on their money.
I am extremely sensitive to the plight of anyone else who has been burned by a bank failure, which are fortunately rarer than they used to be. And I am not concerned about the most recent bank troubles, in part because the government is ensuring that everyone will get their money, and in part because this is not the tip of the iceberg that’s about to develop into a full-blown crisis.
In fact, these failures may help lift the biggest weight off the market’s shoulders. I’m not changing my investing strategy, and great stocks that pull back in any resulting selling should be good buying opportunities.
The Pivot Just Got a Lot Closer
I spent time talking to folks over the weekend, but I spent little time worrying about bank failures past, present, or future.
First of all, I didn’t own or wasn’t about to own those banks anyway because they ranked poorly in my Quantum Edge system. For example, Signature Bank’s Quantum Score after Friday’s trading action was just 29.3, which is definitely in the “no thank you” zone.
The failures did spark massive selling in regional banks, which are less protected by the government, raising concerns of “contagion” – or the problem spreading to other banks. California-based First Republic Bank (FRC) plunged nearly 80% at its lows today but “rebounded” to close down 61.8% on massive volume that was more than 50 times higher than average.
I wasn’t in that stock either, which has a better-but-still-too-low Quantum Score of 36.2. Banks often carry a lot of debt, which tends to weigh on their scores and their fundamental strength, and First Republic is no exception.
Through all of this, the stock market itself moved higher today after opening lower. The government has calmed some fears by stepping in to guarantee deposits, so account holders won’t lose money, but investors will. Unlike during the 2008 financial crisis when the government took over the banks, regulators this time let them close.
The indexes in general also moved higher today because this is not a repeat of 2008 with a long string of failures to come. And… it dramatically changed the backdrop for Federal Reserve interest rate policy.
We were close to the end of interest-rate hikes before the banking mess, but we are even closer now. This may have put us into the ninth inning.
According to the CME Fedwatch Tool, investors currently see a 76% chance of a quarter-point rate increase at the meeting next week. And even a 24% chance the central bank stands pat for the first time in a year.
The Silicon Valley Bank failure was directly rated to higher interest rates, and I can guarantee you (as much as anything can be guaranteed in life) that the Fed does not want to fight inflation at the expense of our financial system. That is a losing proposition no matter how you slice it.
SVB is partly to blame in its failure. The bank invested heavily in U.S. Treasuries, which have been falling as interest rates have risen. Newer bonds carry the higher rates, so older bonds are worth less. To raise money to meet withdrawals, the bank had to sell older Treasury bonds at losses.
To be fair, though, Treasuries are historically “the safest” securities, and deposits kept simply in cash were getting roasted by inflation to the tune of 8% a year. This isn’t the kind of reckless and unscrupulous behavior that contributed to so many bank failures in the 2008 crisis.
The bank was between a rock and a hard place and reached a breaking point. That breaking point has to get the Fed’s attention, and I see no other option beyond easing up on rate increases and – perhaps even more importantly for the upcoming meeting next week – beginning to speak in much more “dovish” tones that will calm investors.
The Perfect Time for Quant-Based Stock Picking
I feel more confident than ever that we will see the last interest-rate increase sooner than later. I think rates will stay around where they are now for the rest of the year, and believe it or not, I think the Fed will be able to start cutting rates again in 2024.
I think we should all be prepared for increased volatility with the overall trend pointing slightly up.
Many stocks will bump along. Some will get hammered. But others will thrive.
This is what’s known as a “stock picker’s market.”
Which is fine with me. In fact, my Quantum Edge system is designed for that.
Shares of the “best” companies will continue to be high performers – even if indexes like the Dow or the S&P 500 bump along. Investors who “pick” thriving stocks will stack wins. These are the stocks with superior fundamentals, strong technicals, and lots of Big Money flowing in.
A directionless, uncertain market like this one is tailor-made for a systematic quant-based stock- picking system like the one I’ve designed for you here in Quantum Edge Pro. It helps us identify the thriving companies with the ingredients to move higher.
We’ve seen this here in 2023 as the stocks currently in our Quantum Edge Pro portfolio have easily outperformed the market so far. We’re not immune from the choppiness, but the overall performance is strong.
And I still have a few dozen stocks on my watchlist. The twitchy environment should give us great opportunities at attractive prices.
In the end, the direction of the market matters less than the quality of the stocks we own. As long as there is some buying going on – and there is in virtually every market – then there are stocks that will do well. We can sniff out that buying thanks to our data retrieval and analysis.
In a stock picker’s market, you want to be sure to invest in the best of the best – stocks with the most important qualities that are highly predictive of higher prices. You won’t bat a thousand, and I won’t bat a thousand. But if you’re smart about risk management and invest in elite stocks, you can expect those stocks to shine even as many others struggle.
Editor, Jason Bodner’s Power Trends