Stocks fell this week as investors turned more bearish. You can blame Fed Chairman Jerome Powell for that as well as troubles in the banking sector.

 

"Higher for Longer" may be finally sinking in. Powell's two-day testimony in front of the House and the Senate this week was decidedly hawkish. In retrospect, there was nothing new in his statements, but for some reason the financial markets were willing to listen. Congress heard his message as well: inflation is still a problem, the jobs market needs to weaken, and if higher interest rates mean a recession, then so be it.

 

Those who had been confident that the Fed would raise the Fed funds rate by only 25 basis points at the March FOMC meeting are having to rethink that stance. Chairman Powell would not commit to a specific increase. He insisted the Fed would remain data dependent in determining the next rate move. Over in the bond market, indications are that a 50-basis point hike is just as likely now as a 25-basis point hike.

 

However, the Fed is not the only concern of the markets. Two regional banks, one a noted small crypto bank, Silvergate Capital Corp., announced that they would be "winding down" operations. On Thursday, a second bank, SVB Financial Group, which owns Silicon Valley Bank and focuses on lending money to start-up companies, announced they are being forced to sell assets and raise $1.75 billion in a stock offering. This is the 16th largest U.S. bank. Management admitted that higher interest rates are hurting their bond holdings, which is weighing on the company's flow of cash. On Friday, banking regulators closed the bank and the FDIC has taken over.

 

These announcements triggered a wholesale round of selling in the banking sector. Silvergate's stock price was down almost 42 percent, while Silicon Valley Bank's shares lost more than 60 percent of their value and another 40 percent in after-hours trading. The global mega-banks fell along with the rest of the sector. Those big banks suffered 5 percent-plus losses, while the regional bank's exchange-traded fund also fell by over 8 percent.

 

On Friday, the much-awaited U.S. jobs report for February came in stronger than expected with the nation gaining 311,000 new jobs, versus an expected gain of 225,000. However, the unemployment rate ticked higher to 3.6 percent on a rise in labor force participation. Average hourly earnings ticked down to plus-0.2 percent from plus-0.3 percent, which was a small positive on the disinflation front. 

 

As you might expect, the troubles in the banking sector spilled over into the overall markets. The three main averages — the S&P 500, the Dow, and NASDAQ — lost 1.5 percent-2 percent on Thursday and continued down on Friday. It seems to me that the market's direction is going to be dependent on what happens on Tuesday. That is when we will receive the next all-important Consumer Price Index release for February. Investors, like the Fed, remain data dependent.

 

A cooler CPI number would be an excuse for markets to rally and climb out of this hole we have dug for ourselves. A hotter number would mean the rate of inflation remains stubbornly higher than the Fed would like. That would almost certainly mean we decline with the S&P 500 Index testing 3,800 or lower as a result. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.