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Fear is palpable! Market crashing again? Reminders.

Saturday, March 18, 2023

The week started with the shutting down of Silicon Valley Bank and Signature Bank by U.S. regulators.

The U.S. regulators announced measures which ultimately bailed out the banks.

Then, we saw Credit Suisse reporting "material weaknesses" and the Swiss National Bank stepping in to backstop the troubled bank.

Credit Suisse took a 50 billion Swiss Francs loan from the Swiss National Bank to strengthen liquidity.

Then, a consortium of 11 largest U.S. banks rescued First Republic Bank, the 13th largest bank in the U.S.A., by jointly depositing US$30 billion in the troubled bank.

After all that happened, Mr. Market ended the week with a dramatic down day in the U.S. stock market on Friday.

The Fed increased interest rate a year ago in March 2022 for the first time since 2018. 

Since then, the rapid rate at which interest rates have been increased has caused a lot of pain for homeowners as well as investors in the real estate space.

The pain is most keenly felt in the high growth but negative earnings tech space and if you are a tech investor, you know this firsthand.

The people who said that something would break under the growing pressure of such rapid rate hikes are now looking rather prescient.

What would they say now?

Not surprisingly, that things will continue breaking as long as the Fed continues to hike interest rates.

With the ECB having hiked interest rates in the EU by another half a percentage point, the Fed is probably going to hike interest rates in the U.S. next week too as they stick to their plan to fight sticky inflation.

Mr. Market, already jittery, while initially assured by the show of solidarity in the U.S. banking industry, became depressed again on Friday when First Republic Bank suspended dividends.

In an environment where depositors could lose their savings and where investors in both stocks and bonds are losing money, heightened volatility in the stock market is unsurprising.

Fear is palpable.

It drives Mr. Market into self-preservation mode.

If the confidence deficit continues, then, more money could flow to the perceived safety of U.S. government bonds, and we could see yields lower.

During the COVID-19 pandemic, I blogged about how I was worried because my passive income was reduced due to my businesses either suspending or reducing dividends.

My relatively high level of CPF savings was the only "investment" that continued to pay what I expected it to pay, uninterrupted, which highlighted to me the importance of having an allocation to high quality fixed income in any portfolio.

So, I can understand Mr. Market's negative reaction to First Republic Banks's decision.

Many people depend on dividends for a living or to at least fund part of their expenses.

The still troubled bank saw its stock price recovering from a day ago on Thursday only to see it plunging 32% on Friday.

When the bear comes out of its cave, none is spared, and we saw the stock prices of large U.S. banks beaten down too as even JP Morgan saw a 3.78% decline in its stock price.

When Mr. Market is gripped by fear, he becomes irrational, and the baby gets thrown out with the bathwater.

As U.S.A. is still the largest economy in the world, what happens there often spreads to the global markets.

So, we could see Asian markets echoing that fear in the U.S. stock market.

I have said many times before that we cannot predict what will happen but if we are prepared, we need not worry and we could instead benefit.

Don't be overly pessimistic.

Don't be overly optimistic.

Be pragmatic.

This week, I was on steroids. 

I have published too many blogs regarding the stock market and what my plan might be.

So, if this is your first visit in as long a time, you will have a lot to read.

Have a good weekend.

Ticketing for "Evening with AK and friends 2023" is ongoing.


garudadri said...

Dear AK
Yes, the fear is palpable. But at the same time, in the US, money rotated out of financials and energy - not out of the market, but into growth, basically megacap tech. The recessionary playbook playing as expected. Industrials and materials suffered as well. However, the indexes are still high, valuations wise as the tech dominated indices are built like that. Individual investors will and are faeeling more pain than what the headline indices reveal
As far as our market is concerned, money seems to have gone out of financials into REITS, Most of the local favorite REITS are better off this week. This might reverse if the fed goes ahead with a 25 base point hike and there is a hawkish statement from them, the latter is unlikely.
I think the fed will adopt a dovish posture, even if they hike, and the bond market will like it. There is a chance of a relief rally over there and the SPY might reach 4100. Thereafter, the first quarter earnings from mid-April, will provide the lead
Overall, the fed pivot is very likely mid year. The markets are forward looking and therefore, if earnings are good,they might even go higher
As far as SG is concerned, we do not need to think too much at all.
Simple plan
1- Buy the banks if they drop and hold long term
2- Buy the good REITS and hold them long term
These will serve as a natural hedge to each other and let the dividends flow
Stocks like Wilmar, ST Engineering, Sheng Siong, Netlink, Keppel Infra can all be added at pullbacks and they will boost the dividend flow further
Overall, the chances are that we will see at least modest capital appreciation but more likely benefit from dividends and reinvesting those, will create wealth in the long term
Pain on this path is inevitable but there is no alternative.
Best wishes

AK71 said...

Hi Garudadri,

Thanks for the very thoughtful comment, as usual.

Also, thanks for sharing your shopping list. :D

Yes, there is an increasing expectation for a "dovish hike" by the Fed.

I have absolutely no idea how Mr. Market is going to behave next week or the week after and after.

So, I will just have to wait and see.

As an investor for income, my plan is similarly simple like yours.

Not exactly the same but similar.

Apart from waiting for an opportunity to increase exposure to businesses I like, I will also continue to put some money into quality fixed income. :)

Pain? What pain?

This is but a pinch to investors who have a longer term perspective investing in bona fide income generating assets. ;p

gagmewithaspoon said...

Hi AK, I love that you are posting so much more! makes my day when I click on your blog and see a new post to read and ponder. What are your thoughts on Sembcorp? I realised I had bought it on a whim and when I checked it again, it's pretty high now! do you think it will continue to give good dividends? it is cyclical so wondering if this is actually time to rotate out

AK71 said...

Hi gagmewithaspoon,

Glad you aren't bored with AK talking to himself. :D

The last time I did anything with SCI was in 2020.

I haven't done anything with my investment since.

Quite happy to simply hold and get paid.

You must have half expected AK to reply like this. ;p

Investment in SCI is larger now.

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