Last year, the Wall Street mavens decided that mega-cap Technology and Communication Services names had seen their best days and future market rallies would be led by cyclical stocks. That theory worked well in 2022, but the script was flipped as soon as the calendar changed.

This year, cyclicals are trailing badly as defensive sectors are the alternative to growth on down days.

The rationale was easy to understand because it’s worked in the past. But I always found it odd to think at the start of the Fourth Industrial Revolution; investors would shun the names at its epicenter. So yes, higher valuation names typically come down as interest rates are climbing, and that’s exactly what happened.

But in the long run, I think it’s nuts not to own the best, richest, and best-positioned names in the market.

That said, there are other opportunities as well. But there are serious unanswered questions, and the near-term will probably remain choppy. I know fundamentals don’t seem to matter, but they do.

The Fed Is In A Pickle

The Federal Open Market Committee (FOMC) meets next week, and they will hike rates 25-basis points (bps), and there is still a chance they will hike in the subsequent meeting as well. After that, it’s a jump ball of possibilities.

The CME FedWatch Tool model sees six rate cuts beginning in June. There are other gauges that see fewer rate cuts. And opinions run the gamut on Wall Street.

As all of this is happening, there is still a chance for a soft landing or shallow recession.  It’s up to the Fed and whether Jay Powell will go against his pledge not to pause. He knows he would be more readily forgiven for pushing the economy into a deeper recession than necessary versus allowing inflation to fester and roil the economy.

The Job Gets Harder

Remember, the Federal Reserve is trying to suck money out of the economy, but their bank rescue could pump up to two trillion into banks.

Dual Mandates Versus Duel Mandate  

The Federal Reserve has a dual mandate of maximum employment and low inflation. But they cannot hold down inflation if cash is pouring in from the Federal Reserve. As it turns out, the Fed just added almost $300 billion to its balance sheet and has already given out $11.9 billion in its Bank Term Funding Program (BTFP).

Irish Eyes are Smiling.

My buddy Ryan Detrick points out that St. Patrick’s Day is usually one of the best days for the stock market.

Let’s hope so….investors deserve a great day.

Portfolio Approach

We un-suspended our Current Buys in our Hotline Model Portfolio.

         

Today’s Session

I’m becoming more concerned about the banking situation in part because the administration is focused on messaging rather than clear communication and honest solutions. This nonsense of taking victory laps and trying to shift blame in the heat of the moment is frustrating when it comes to things like the Afghanistan withdrawal, but it is dangerous when it comes to the banking system.

European regulators took a shot at how sloppy their American counterparts have been – and they are right.

Meanwhile, money is moving around to buttress banks – record amounts of money.

• Discount Window $153 billion
• Federal Home Loan Bank $112 billion
• FDIC $143 billion from Fed
• BTFP (Bank Term Funding Program) $11.9 billion

I do not want to panic, and yet, we have to be concerned at the sheer size of the cash building up in the banking system.

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