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An Alternative To Money Market Funds

May 2023

MARKET OVERVIEW
April is behind us and the market enjoyed its second straight positive month!! The unexpected strong start to the year has taken place even with three of the largest bank failures in US history occurring within weeks of each other. Silicon Valley Bank and Signature Bank collapsed within days of each other in March. Then, over the final weekend in April, First Republic was seized by the FDIC. As of April 30, The Dow Jones Industrial Average was up 2.87%, the S&P 500 was up 8.59% and the Nasdaq was up 16.77%, year to date.

ECONOMIC SUMMARY
Last Friday’s Nonfarm Payroll Report (NFP) was strong as 253,000 jobs were added, well above the estimate of 180,000 jobs. Note that employment for the prior two months was revised down by a combined 149,000 jobs. The U-3 unemployment rate fell to 3.4%, a level not seen since 1969. Meanwhile, the U-6 rate fell slightly to 6.6% last month. The Labor Participation Rate held steady with the prior month’s 62.6% level. Meanwhile, Average Hourly Earnings rose slightly to 4.4% in this month’s report, year over year. The next NFP report arrives on June 2.

FEDERAL RESERVE
The Fed met on May 2-3 and raised the overnight lending rate by a quarter point. Some economists felt the Fed would pause at this meeting due to the collapse of Silicon Valley Bank, Signature Bank and First Republic. Nevertheless, the Fed continued with another rate increase. The overnight rate moved to a range of 5% to 5.25%. Last Friday's strong jobs report will probably see the Fed raise rates by another quarter point at the next Fed meeting June 13-14..

STOCKS TO WATCH
Over the final weekend in April, the FDIC seized First Republic Bank (FRC). Then the FDIC made a deal with JP Morgan (JPM) in which all depositors of FRC became depositors of JPM last Monday, May 1. JPM picked up about $92 billion in deposits including the $30 billion that JPM and other banks placed with FRC in April. The FDIC agreed to absorb most of the losses on FRC’s mortgages and commercial loans which is why the bidding for FRC became so tense after the FDIC seized FRC. In short, this is a windfall for JPM as it believes the transaction will add $500 million in profit annually.

It is unlikely JPM would have made this deal if it believed the banking turmoil would linger for much longer. In fact, my sources in Washington tell me that once the US House reconvenes Tuesday, May 9, there is a very good chance the House and Senate will agree on a deal on the debt ceiling and dramatically increase the FDIC limit on insured deposits. This amount is now capped at $250,000 per account. Two stocks that could rally sharply if the banking turmoil does subside are Bank of America (BAC), the 2nd largest US bank and Charles Schwab (SCHW) with $7.58 trillion in client assets as of March 31, second only to BlackRock in the industry. Both are trading just above their 52 week low share price. BAC closed on Friday May 5 @ $27.71 vs. its 52 week low of $26.32. SCHW closed @ $49.24 on Friday May 5 vs. its 52 week low of $45.00.

My weekly radio show is now on holiday and should return soon on WWPR 1490 AM. My prior radio shows and columns are available here.

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