What Does the Market Think?

What does the failure of Silicon Valley Bank mean? Are we going into a recession? Is the fed done raising rates? Is the stock market going to crash? Everyone has an opinion that is reflected in the market. So let’s see what the market is saying.

People are rightfully worried about how the fall of SVB might impact other regional banks. There is full-on panic in those names.

But for now at least, that fear seems to be mostly contained. If there was real panic in the market beyond the names impacted, you would expect stress in junk bonds, senior loans, investment grade bonds, and the Vix. We’re not seeing any of that right now.

While i’s interesting to look at the market’s reaction to an event, it’s important to remember that the market doesn’t always get the story right, and things can change very quickly. For example, not even two weeks ago, I wrote a post in which I said:

“There’s an interesting dynamic at play in which “everyone” seems to be bearish on stocks except the stock market itself.”

I looked at the strength in things like industrials and small caps and semi-conductors and asked if the market might know something we don’t. In fairness, I don’t think the market saw SVB coming, but that’s my point. I assume the market is always right, but sometimes it isn’t.

The usual suspects are relatively calm, there is absolute pandemonium in the interest rate market. A couple of weeks ago the market was pricing in a 79% chance of a 50 basis point rate hike. Now it’s saying there’s a 0% chance that it will happens. Zero…point…zero. And just last week, there was a 0% chance that the fed would pause. Now that’s looking like a coin toss.

Here is the same chart, GIF’d for your pleasure. (H/t @nick) 

If we go out to December, there is now a 1 in 4 chance that fed funds will be 100 basis points lower than they are today!

The volatility surrounding rates for December is astronomical.

And maybe this is the reason why the stock market is holding up relatively well. It knows the fed is done. But the narrative can quickly shift from “phew, the fed is done” to oh no “we’re going into a recession”.

One of the biggest takeaways for me over the last couple of days is that risk is what you don’t see coming. It’s never what’s in the headlines.