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TSP Talk: Fed contains bank run, but now faces CPI.

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Yesterday was our third day of bank drama and, despite a second bank failing over the weekend, it was the calmest action of the three. Stock indices opened down sharply, quickly slipped lower, then bounced back above the opening prices within the first hour of trading. Once the dust settled, index prices danced between a trading range contained by confusion and the unknown. Eventually the indices closed at the low end of that trading channel, but for the S&P 500 that meant only a 0.16% loss. Weakness in small caps brought the S-fund down more than 1% on the day to shrink its 2023 return to less than 1%.

Daily TSP Funds Return

The Federal Reserve, Treasury Department, and Federal Deposit Insurance Corp. announced emergency measures on Sunday after regulators were forced to take control of Signature Bank, the second bank in a matter of days to fail to have the assets to cover depositors' withdrawals. In order to contain this bank run and ease the minds of depositors, the trio promised to protect deposits in the two banks (even those uninsured) and provide loans to the two banks using their bonds face value as collateral, not their current market price that has been driven down by rising yields.

Nearly everything opened down Monday morning. For a moment it seemed certain U.S. stocks (C and S-fund) were about to erase what was left of their 2023 gains and dive into a negative yearly return. But rather than an all out sell-off, we had a rotation into defensive stocks and large tech companies. Both Apple and Amazon ended the day with more than 1% gains, and the NASDAQ was up 0.45%. This was enough to buoy the S&P 500 into positive territory for most of the day and at times reaching gains over 0.6%. But for the rest of the day the index prices were bound to a trading range because there was no development to the bank situation.

Of course, the bank problem wasn't 'fixed' but contained for now. The financial sector of the S&P 500 was by far the worst performer of the sectors with a loss of -3.78% for the day. The next lowest return was Energy which was down -1.96%. Seven of the eleven sectors of the S&P 500 produced gains for the day; another example of how this was more of a rotation than a sell-off.

That is likely to change again today with the release of the February Consumer Price Index (which has not been released as of writing this). The Fed now has to combat inflation while protecting financial stability among lenders. Of course financial stability is more fragile and a pressing matter at the moment, but the Fed's mandate is price stability. Any quantitative easing threatens their creditability. The greatest obstacle for the Fed would be if the CPI numbers came in hot today over the 6.0% expected for the year-over-year. Who knows what they will do in that situation or how the markets will react, but for now probabilities have a 50bp rate hike off the table. The market will be happy to see CPI numbers less than expected. That would increase the chance of no rate hike in next week's meeting.

Adding to Tom's discussion on bond yields, 10-year Treasury yields did drop further after intervention was taken by the regulators, including the Federal Reserve, that included using the banks' bonds face value as collateral in loans for the two failing banks. That may give some relief to banks that face the same problem of unrealized gains of bonds as held by the SVB and SB.

The dollar gapped down as well again and now sits below its 50-day EMA. UUP found support on an open gap left open in February.

Admin Notes:

I'll be gone: Next week could be tricky for me as I have been called for jury duty. Because the courts are 90 miles away from where I live, and I don't know how long I might have to be there, I made reservations at a hotel and decided to stay there a few days either way, just in case. The problem comes if I do have to serve on a jury starting on Tuesday (thought it was Monday). I will really be hampered during the day, not only because I won't be able to watch the market, but I may not be able to send alerts if any of our services require it. That would include TSP Talk Plus, RevShark, and Intrepid's services. And of course if there is a trial of any length of time, it's a bigger problem and I will have to figure something out.

TommyIV, who writes our weekly Wrap Up, may fill in for a day or two writing my daily commentary, but it is not likely that he will be able to send alerts as he works on his Last Look reports around that same time. I can only hope for the best.

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The S&P 500 (C-fund) was down sharply to start the day and looked as if it was about to test the 3800 level. But rotation into defensive stocks and large tech companies lifted the index which spent most of the day trading in the red bracket above the closing price. After all that, the index was even for the day with 5 minutes left in the trading day. It was in those 5 minutes that led the C-fund to its 0.16% loss for the day. Take note of the progressive rise in volume. This bank situation has got investors attention.

The DWCPF (S-fund) slipped down this morning but did not have the large tech companies to help buoy the index price. Small caps held most the weakness of the day which includes the smaller banks that are vulnerable to the current potential bank run. The index did rise enough to close the open gap produced at the open but could not keep up with large caps. The S-fund fell 1.18% on the day.

The EFA (I-fund) slipped closer to its 200-day EMA, a moving average both the S&P 500 (C-fund) and DWCPF (S-fund) have traded below in last few trading days. The ETF is running out of trend line support to be credible to new buyers. The I-fund fell 1.03% on Monday.

BND (bonds / F-fund) outperformed the stock funds again. The ETF gapped up a second day and opened above its 200-day EMA for the first time since early February. Bond price rose higher early in the day but as certain stock sectors became equity safe havens as the day carried on, the demand for bonds dropped and the ETF ended up closing just below that 200-day EMA. The F-fund was up 0.78% for the day and now outperforms both the C and S-fund through 2023.

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Thanks so much for reading. We'll see you back here tomorrow.

Thomas A Crowley (TommyIV), filling in for Tom Crowley

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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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