Turbulence In The Financial Sector And Latest Inflation Report Shows Some Promising Figures

TL;DR

• The financial sector has had it’s rockiest week since 2008, with Silicon Valley Bank and Signature Bank being shut down by the regulators, and many other banks seeing double digits stock price losses
• Amongst all this commotion, new inflation figures were released showing the headline rate has reduced again, down to 6.0% on an annualized basis
• With all this uncertainty around, hedging strategies such as Q.ai’s Portfolio Protection could play an important role for investors
• Top weekly and monthly trades

Subscribe to the Forbes AI newsletter to stay in the loop and get our AI-backed investing insights, latest news and more delivered directly to your inbox every weekend. And download Q.ai today for access to AI-powered investment strategies.

Major events that could affect your portfolio

As last week’s newsletter went out, it was all kicking off in the banking sector. SVB had just gone under, and for many startups, their founders and employees, it was a tense weekend waiting to see what the financial implications would look like.

In the end it was as good of a result as could have been hoped for, with the regulators guaranteeing all deposits and ensuring companies had access to their cash practically immediately.

But, the financial sector wobbles didn’t end there. Crypto-focused Signature Bank was also closed down by the regulator on Sunday night, and many other regional banks saw their stocks plummet at Monday’s market open.

Since then, it’s been an incredibly volatile week, and it’s not just US banks that have been in the firing line.

Fresh concerns have been raised around Credit Suisse, as their biggest individual shareholder, the Saudi National Bank, announced that they wouldn’t be providing any further cash to the Swiss bank. The stock has seesawed all week, dropping substantially on this announcement, before gaining the next day on news of a $54 billion lifeline from the Swiss National Bank.

While all these bank problems aren’t directly related, many in the sector are facing similar challenges. Simply put, the Fed’s rapid interest rate hikes after a decade of record low rates is putting a strain on the underpinnings of the financial system, the bond markets.

It’s likely that these liquidity crunches and duration mismatch issues will continue to crop up over the coming months.

—

Not taking the top news billing for a change, the latest Consumer Price Index (CPI) inflation figures came out this week, showing another steady reduction in the annualized rate of price rises.

CPI rose by 0.4% in February, in line with analyst forecasts and bringing the annual rate down to 6.0% from 6.4% in January. Inflation continues to head in the right direction, having now fallen for eight consecutive months.

Even so, it’s not coming down as quickly as many would like. An inflation rate of 6% is still more than double the target rate of 2-3%, which Fed Chairman Jay Powell has said they will “use all tools at their disposal” to get it back down to.

But the landscape has changed substantially since he made those comments. Every increase in rates puts additional pressure on businesses, including banks. So far this has simply been considered a necessary adjustment in order to tackle inflation.

Now that the banking sector is looking on shaky ground, the Fed may be more reluctant to pile on additional pressure.

The next Federal Open Market Committee meeting happens next week, and a 0.25 percentage point rate hike had been widely expected, with the potential for a 0.5 percentage point increase not totally out of the question.

That higher figure is almost certainly off the cards now, and we could even see a surprise respite with no rate hike at all, to allow the financial some time to steady the ship.

This week’s top theme from Q.ai

The overarching theme right now is uncertainty.

Up until last week it’s been uncertainty in the tech sector, with widespread layoffs and cost cuts in what Mark Zuckerberg has labeled ‘The Year of Efficiency.” Now it’s the financial sector, with problems in banking having the potential to touch essentially every other market sector in existence.

In the middle of it all is the Fed’s battle with inflation, and their FOMC rate decisions which can wipe billions of dollars off markets in an instant.

But investors can’t afford to just dump their money in cash and wait it out. To begin with, this week has shown us that cash isn’t always as safe as it seems, and secondly, it loses value in real terms with inflation rates significantly higher than interest on cash deposits.

One of the most effective approaches to this issue is to implement hedging strategies against your investment portfolio. Traditionally this has been a real challenge for retail investors.

Q.ai’s Portfolio Protection uses AI to take the complexity out of the strategy, and allow anyone to add hedging downside protection to their portfolios. Every week our AI analyzes your portfolio’s sensitivity to a range of different types of risk, and then automatically implements hedging strategies to protect against them.

At the same time, it aims to do this while capturing most of the upside. In markets like the one we’re in now, it helps to have AI in your corner.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Anywhere Real Estate (HOUS) – The real estate services company is one of our Top Buys for next week with an A rating in our Technicals factor.

Madrigal Pharmaceuticals (MDGL) – The pharmaceutical company is our Top Short for next week with our AI rating them an F in Quality Value. Earnings per share were -$17.32 in 2022.

Cantaloupe (CTLP) – The digital payments and software company is our Top Buy for next month with an A rating in Growth. Revenue was up 20.6% in 2022.

Carvana (CVNA) – The online car dealer is our Top Short for next month with our AI rating them an F in Quality Value. Earnings per share were -$15.74 in 2022.

Our AI’s Top ETF trades for the next month are unchanged from last week. They are to invest in fintech, cutting edge tech and microchips, and to short bonds. Top Buys are the ARK Fintech Innovation ETF, the ARK Next Generation Internet ETF and the VanEck Semiconductor ETF, and Top Shorts are the iShares 7-10 Year Treasury Bond ETF and the iShares 20+ Year Treasury Bond ETF.

Recently published Qbits

Want to learn more about investing or sharpen your existing knowledge? Qai publishes Qbits on our Learn Center, where you can define investing terms, unpack financial concepts and up your skill level.

Qbits are digestible, snackable investing content intended to break down complex concepts in plain English.

Download Q.ai today for access to AI-powered investment strategies.