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Defense Wins Championships

May 8 to 12, 2023


Defense Wins Championships

May 8 to 12, 2023

Weekly Commentary

Market Recap

  • Equity markets endured the FOMC announcement, some key economic data, debt ceiling concerns and ongoing trouble in the U.S. regional bank sector—just another week in the office. The S&P 500 ultimately finished down a modest 0.8%, but not without some meaningful swings. Banks were hit hard, down 4.6% on the week, with some regional names under intense pressure. Defensive sectors—see health care and utilities—held at the top of the pack along with technology.
  • It’s also noteworthy that the rangebound S&P 500 has mainly been propped up by the large heavyweights, many of which are in tech or communications services, and have seen valuations benefit from the prospect of a Fed pause.
  • In fact, the S&P 100 large cap sector is up 2.6% over the past three months, masking an 11% slide in the smaller and broader Russell 2000. Meantime, the TSX gave back 0.5% on the week, with weakness in energy and health care weighing.

Interest Rates

Last week, as we’d expected, the U.S. Federal Reserve raised its key interest rate by 25 basis points. But it was Fed Chairman Jerome Powell’s remarks afterward that prompted much debate—while he emphasized that “a decision on a pause was not made,” many observers nonetheless interpreted the Fed’s actions as such. This sentiment was compounded by the removal of a line from the previous decision’s post-meeting statement, which had said that “the Committee anticipates that some additional policy firming may be appropriate” to combat inflation1; this time around, the statement merely mentions “determining the extent to which additional policy firming may be appropriate” without saying that it anticipates such moves2. The result? Some investors are once again expecting interest rate cuts this year. Even before the Fed’s announcement, people had lined up into two camps: the doves, who were asking, “do we really need more rate hikes?”, and the hawks, whose question was, “how many more do we need?” Our evaluation is that a rate cut in 2023 remains very unlikely and that this may very well be the last one. It’s the uncertainty that gives some investors a license for optimism—but it’s also worth keeping in mind that if the Fed had announced a pause, that likely would have made markets nervous too – especially given the recent bank situations and tighter credit markets.

Bottom Line: Despite a possible rate-hiking pause by the Fed, a rate cut this year remains unlikely.


The First Republic Bank saga is in the books, with news breaking last Monday that JPMorgan had purchased the majority of the bank’s assets after it had collapsed and been seized by the Federal Deposit Insurance Corporation (FDIC). We characterized the situation as a company-specific crisis, which we still believe. But despite assurances from the government and others that the U.S. regional banking system is stable and sound, news that another regional bank, PacWest, is now in trouble has raised additional concerns. What this latest development highlights is that the regional banking system is still delicate. Since the beginning of the crisis with Silicon Valley Bank (SVB), there’s been skepticism about the perceived “weakest” regional bank—first it was SVB, then it was Signature Bank and First Republic, and now it’s PacWest. Outflows from those banks have had to go somewhere, and that’s what’s driving ongoing uncertainty. We wouldn’t be surprised if more regional banks get nervous and pre-emptively consider acquisitions, which is what PacWest appears to be doing. The good news is that each time a bank is saved, the regulators are able to scale back their protections, and uncertainty—and therefore instability—diminishes.

Bottom Line: There will always be a “weakest” regional bank, but the threat of a broader banking crisis is likely to remain low.


Recently, oil markets have been somewhat more volatile than usual, prompting speculation about where crude prices may be headed. Our team deserves a pat on the back for their accurate assessment of the situation—earlier in the year, we had opened a covered call position in Energy collecting premiums as oil stayed range-bound and then eventually took our profits by selling our tactical position when OPEC cut production and prices soared. In general, we still like oil, but not under the current environment and at current prices, which are around $70 per barrel for WTI Crude. The $60-per-barrel range would be attractive, but only if and when we get more certainty on the macroeconomic picture. In that regard, there are a couple of developments we’ll be watching closely. The first is China’s economic reopening—if it goes smoothly, that could provide a serious boost to oil demand. And the second is the possibility of a recession, which could prompt a slump in energy demand. As long as there are open questions on those fronts, it will be difficult to predict when oil prices will go up strongly again.

Bottom Line: We’ll need more clarity on macroeconomic questions and the timing of a possible recession before we’ll be confident jumping back into oil.


As Toronto Maple Leafs fans will surely tell you, reliable defense is a necessity if you want to win. After several months of staying balanced, we now believe that it’s time for defensive positioning in our portfolios. As previously mentioned, many investors are clearly misunderstanding the Fed, remaining unjustifiably optimistic about the potential for interest rate cuts. This leaves room for a downside surprise in markets. The decision we’re now faced with is between selling some equities or adding covered calls to collect income from premiums—for instance, on our Industrials position. We’ll continue to evaluate those options going forward. Overall, Quality is staying on top. And regionally, there’s the question of China—when will be the right time to pare back our position? Those are the questions we’ll be asking ourselves in the coming weeks, and as always, we’ll adjust our positioning as warranted.


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