A Historic Pullback Is Driving the Next Market Shift

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Now, continue reading below for Clint Brewer’s latest market analysis…

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When it comes to the Federal Reserve, you’re probably focusing on the wrong thing.

The debate on whether or not the central bank will raise rates by another 0.25% doesn’t matter.

Here’s what does matter… The bank crisis fallout is doing the Fed’s dirty work.

Financial conditions are a broad term to describe how the availability and cost of credit impacts economic activity. Looser conditions and plentiful credit mean good times are ahead, and vice versa.

Right now, seismic shifts are happening with tighter financial conditions. And that comes as the second largest bank failure in U.S. history (Silicon Valley Bank) is forcing the entire sector to retrench.

Here’s what these conditions mean for the Fed’s next move and the stock market…

Doing the Fed’s Heavy Lifting

In order to get inflation under control, the Fed raises interest rates to ease price pressures.

That’s because higher rates trickle through to demand. Businesses have second thoughts about expanding operations, and consumers put off big purchases.

Even Fed Chair Jerome Powell has described interest rate policy as a “blunt tool.” What he means is rate hikes can have unforeseen repercussions, like what emerged last month in the bank sector.

Banks are now facing fleeing deposits as cash seeks better returns. Meanwhile, higher rates reduce the value of bonds that banks hold as reserves… creating losses in their own portfolios.

As a result, banks have been cutting back on lending activity at historic levels to preserve precious capital. This pullback in bank activity will drive the next major shift in the Fed’s rate policy… and more stock market volatility.

Record Retrenchment

On the chart below, you can see the rate of change in U.S. commercial bank loans and leases.

During the last two weeks of March, this figure plunged by nearly $105 billion (red arrow)…

This drop eclipses anything we’ve ever seen – even during the 2008 financial crisis.

And since less capital is available to help grow the economy, this sharp pullback is turbocharging the Fed’s efforts to slow activity.

But even the Fed and its hundreds of PhD economists didn’t see this one coming… which is why the Fed is likely done raising rates until a clearer picture of the bank crisis fallout emerges.

As a trader, here’s what that means for you… Initially, Fed pauses are cheered because 85% of the time, stocks move higher over the next three months.

But these pauses are also a sign that something is breaking in the capital markets. And eventually, that catches up to the economy and stock market.

So we can expect more volatility, with quick changes in direction to the upside and downside.

But if we stay tactical in our trading approach, that means this market will offer plenty of opportunities ahead.

Best regards,

Clint Brewer
Analyst, Market Minute

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