Is the Bear Market Nearing an End Despite Bank Failures?

•  trendspotteam

•  Mar 20 2023
 

The Federal Bank injected a massive sum of money to save SVB and other banks badly hit by the interest rate hikes initiated last year. As a result, the market speculated that the Fed will halt or reduce the rate hikes, and may even bring it down this year due to the grave situation of the banks. While reducing interest rates in 2008 led to economic stimulation and record-high stock indexes, the current situation of inflation is much more critical.

Mike Wilson, the Vice President of Investments at Morgan Stanley, believes that the bear market is nearing its end, despite the current challenges. However, he cautions that the most arduous part is yet to come. In a recent letter to investors, Wilson pointed out that the money supply in the banking system is decreasing rapidly. He explained that even though there is a substantial amount of money, it will not directly enter the market and stimulate the stock market due to increased reserves.

According to Wilson, the market's recent significant decline is due to overly optimistic growth forecasts of companies, coupled with a persistent decrease in credit caused by high interest rates in the economy.

"This is how it always happens from our experience, and this is why the last part of the bear market may be brutal and accompanied by a significant drop in share prices due to a sharp increase in the risk premium that is very difficult to prevent or defend against in the investment portfolio."

It is worth noting that Wilson did not mention the inflation situation in his statement, which is considered the primary reason for the significant decline of indexes in the past year and the ongoing collapse of banks such as SVB and Credit Suisse.

The CPI, released last week, revealed that the inflation rate in February was 6%, indicating a decrease. However, the core index remained high, standing at 5.5%. Although inflation is declining, it is not at a fast enough pace. If the central bank decides to reduce interest rates, as anticipated by the market, it is likely to lead to a resurgence in inflation, regardless of the amount of money injected by the Fed into the banks over the past two weeks.

Larry Fink, the CEO of Blackrock investment firm, stated in his annual letter to investors that the recent rapid increase in interest rates, comparable to that of the 1980s, has exposed vulnerabilities in the financial system. Fink expressed skepticism that the Fed will be able to bring inflation below a range between 3.5% and 4% in the coming years. His stance echoes a report published by Blackrock towards the end of last year, in which some of its senior analysts and employees emphasized that central banks cannot resolve inflation, and that past solutions may no longer be effective.

Conclusion

It is difficult to determine which party is correct, but both parties suggest that there may be further declines ahead. The most significant question at this point is not whether or not there will be a decline, but rather when it will come to a halt.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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