Control Panel: Supply and demand drives asset prices

The prices of all goods and services, including assets like stocks and bonds, are determined by supply and demand. Prices are constantly in flux. Like a giant smorgasbord, brokerages offer an overwhelming variety of assets from which investors can choose. With money markets yielding over 4%, holding cash is currently a safe and rewarding asset.

Demand for assets comes from many investors, ranging from individuals to institutional investors (e.g. pension funds, private equity, etc.) to sovereign wealth funds.

Individual Investors Slow Stock Purchases, Leaving Markets Vulnerable

Net purchases of U.S. equities by individuals set a record in February but have since fallen sharply

By Hannah Miao, The Wall Street Journal, April 2, 2023

Individual investors are losing their appetite for U.S. stocks, leaving equity markets without a dependable leg of support after a rocky first quarter…Individuals bought about $8.9 billion of U.S. equities on a net basis in the 10 trading sessions ended Thursday, down from a peak of $17 billion in the comparable period ended Feb. 16. …

The banking crisis has reignited bets that the Federal Reserve could soon slow its interest-rate increases, giving a boost to stocks, particularly shares of technology companies.

Yet some investors are increasingly concerned about the possibility of a pronounced recession on the horizon, rather than the “soft landing” scenario many had hoped the Fed could pull off in its efforts to tame inflation… [end quote]

The Federal Reserve and FDIC acted swiftly and decisively to stop the spread of the banking crisis in the past few weeks. But potential weakness in small to medium local and regional banks could have a negative impact on small businesses around the U.S. since they provide about 80% of commercial and industrial loans. Problems in this sector could cause the economy to slow, which is why the Fed is expected to slow its increases in the fed funds rate.

It has been many years since business owners had to worry about the failure of their local banks. Failures there could cause serious pain in the vast swathes of the U.S. that have many towns and cities reliant on employers with no access to capital from the bond market.

How Small Businesses Can Find Safety Before the Next Bank Crisis

Financial advisers recommend that business owners examine their accounts now to ensure they are protected in case of a future bank failure.

By Amy Haimerl, The New York Times, April 1, 2023

The collapse of two regional lenders, Silicon Valley Bank and Signature Bank, last month caused a ripple of panic among small businesses across the country as owners watched the news unfold and wondered whether their assets were safe — even if their deposits were not in one of the failed institutions.

Now that the panic has begun to subside, advisers are recommending that small businesses examine their accounts to determine their level of risk and protect their deposits from a future bank failure…

Only 20 percent of the country’s roughly 33 million small businesses have employees, according to the Small Business Administration, which means few have significant payroll costs that can push their deposits above $250,000. And just 5 percent of companies are sitting on war chests from investors [like venture capital].

Business accounts are insured separately from personal accounts. That means one depositor can be insured both as an individual and as a business. However, having multiple signers on a business account does not increase the insurance coverage. …

Banks can mitigate risk through the IntraFi Network, a system that can split a customer’s large deposit into chunks that are less than the $250,000 cap. It then sends those chunks to other banks in the system, essentially giving customers multiple F.D.I.C.-insured accounts without having to open — and track — each account… [end quote]

Businesses should set up an IntraFi Network account. Better to split their accounts between different banks. Also make sure that their payroll company has a backup. But how many will actually do this?

This problem could lead to a gradual recession which could be deeper and longer than expected. The big financial news outlets pay most attention to the large, dramatic events but little to small, cumulative issues. This is a Macroeconomic Risk which may be building under the radar.

Another Macroeconomic risk building under the radar is the growing number of corporate bankruptcy filings. I have been warning about so-called “zombie” companies that could barely make their interest payments even when bond yields were rock bottom. This chart shows the problem when these weak companies are forced to roll over debts they incurred in 2021 but are maturing now.

US corporate bankruptcy filings hit 12-year high in first 2 months of 2023

U.S. corporate bankruptcies are rising in 2023, with the first two months of the year registering the highest total for any comparable period since 2011…

[end quote]

The article has a detailed list of which companies have declared bankruptcy. Of course, 2023 has a long way to run.

The Control Panel is mildly positive. January and February 2023 were strong for both the stock and bond markets, but they are both bouncing up and down in a stable channel. The trade is slightly risk-on. Stocks are still overpriced based on the Cyclically Adjusted P/E Ratio (CAPE Ratio). The bubble has only slightly deflated. The stock market is still buoyed by animal spirits although margin buying has declined. It’s only recently that individual investors are beginning to back away a little.

Oil, natgas and USD are falling. Gold is rising. The Treasury yield curve has dropped sharply over the past couple of weeks but may have stabilized.

The Fear & Greed Index is neutral. Financial Stress has subsided from its moderately elevated level during the banking crisis.

Inflation is still much higher than the Federal Reserve’s target, although the PCE index dropped slightly in March. The Fed addressed the banking crisis by lending money to the banks, not by loosening the fed funds rate.

The METAR for next week is partly sunny. The Fed has the banking crisis under control and there is no new crisis on the horizon. The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.5 percent on March 31, down from 3.2 percent on March 24. This is still an optimistic report. The economy is far from recession. With long-term interest rates declining, recession is moving even further away.



I think “rewarding” is overstating the case. After all, it still is a real yield of about -2 or -3 percent! Safe is an accurate description for most of them.


Too much to reply to here. But vis a vis who bought what in February: Individual investors either did not buy stocks in Feb as stated or they don’t account for anything. The market went down. Since they’ve changed their minds the market has gone up.

Hi Wendy,
What would be your take on the Shiller PE. Do you think it is still relevant with all the money that has been pored into the markets over the years?


@buynholdisdead I often wonder about this myself. Is a CAPE of 16 coming back any more than a 15 cent slice of pizza? Is stock valuation permanently inflated by the gigantic tsunami of monetary stimulus created by the Fed the way consumer price inflation has been pushed for decades by fiscal deficits?

The same could be asked about bonds, which were also suppressed by the Fed’s QE. But the Fed only controls the overnight rate (the fed funds rate) plus a little QT on the long duration end which they quickly reversed just a couple of weeks ago due to the banking crisis. The Treasury yield curve fell but not all the way to its previous level.

There’s no question that the stock market was in a bubble. It had every earmark of bubbles that have happened repeatedly through the history of capitalism for centuries.

The business cycle hasn’t been repealed. The only question is when the next recession will start, how deep it will be and how severely the stock market will be affected.

I hear what you are saying. I think that the Shiller PE is still relevant but we have to remember the unprecedented QE between 2010 and today. I don’t think it’s going back down to, say, 15. But there’s a lot of distance between 15 and 30. I think it will bottom somewhere in there.



That is kind of what I am thinking Wendy. It will be elevated but lower than it is now. Ever since the pandemic though everything has just become crazy.