Bank troubles muddy the market waters: 3 things to know

DEWITT, Mich. - March 23, 2023 - PRLog -- Volatility from the latest bank failures may make the market's strong start to 2023 feel like a distant memory. While this is a new wrinkle in an old bear market, troubles in the banking sector should not be dismissed. They come at a precarious stage in which markets were already digesting the crosswinds of Federal Reserve rate hikes and emerging softness in the economy alongside persistent (and encouraging) strength in the labor market.

Here are three things to know about what's happening and the implications for our market outlook:

1. Worries over bank failures won't disappear overnight, but they won't spark a 2008-style crisis.

Markets have endured new ups and downs in a roller-coaster week spurred by the failure of a few U.S. regional banks. An additional character joined this episode March 15, as concerns have spread to a large Swiss bank, Credit Suisse.

It's important to note that while anxiety may spread over which institutions could be in the spotlight next, there are distinct and critical differences between this environment and the banking crisis in 2008.

2. This may add to the economic slowdown that was already underway, but we don't think it changes the broader outcome for the economy.

The banking turmoil that has emerged will likely increase lending standards, raising loan rates and tightening overall credit conditions, which should have a cooling effect on the economy. While the prospects of an economic slowdown are hardly inspiring, there is a silver lining: A softer economy will help accelerate the downward path of inflation. This, in turn, will support a policy shift from the Fed, reducing the need for an extended string of Fed rate hikes — the very catalyst that has driven these disruptions in the banking sector.

3. Emotional headlines and market swings reflect immediate uncertainties, which frequently create opportunities for those with a wider view.

Uncertainties and market volatility are always uncomfortable, but applying a more disciplined approach is, in our view, one way long-term investors create an advantage. We expect larger daily swings as new developments unfold, so realistic expectations are important. But we think investors have an opportunity to lean into market weakness with opportunistic rebalancing and additions to long-term allocations. We continue to see a compelling case for a durable rebound as we progress into and through the second half of the year.

Equities are still markedly above this past October's bear market low, and we think there is credible support for those lows to hold because:

• The trend of disinflation has been established,
• The Fed is almost done hiking, and
• Earnings estimates now better reflect a realistic macroeconomic outlook.