Wow, what a flurry of activity! Daily volatility in the markets has increased substantially in the first part of 2023. A regional banking crisis, changing inflation projections, and geopolitical stress has led to the largest daily swings in interest rates I’ve seen in my career. Even with this backdrop, the stock market logged its second consecutive positive quarter, while bonds had their first positive quarter in some time.
The banking crisis, one of the aftershocks created by raising interest rates so quickly, was the collapse of three FDIC banking institutions. This issue occurred because of three main reasons:
1. Mismanagement – clearly management failed a simple asset/liability match. Holding deposits and investing in long term bonds is a mismatch. When interest rates moved substantially higher, their government bonds held against their deposits lost almost 30% in value.
2. Nearly 94% of more than $151 billion in deposits at the collapsed Silicon Valley Bank, that were held by technology companies, investments funds and high net worth individuals were uninsured (above FDIC limits) at the end of last year (S&P Global Market Intelligence).
3. Outdated Rules – corporations looking for FDIC protection need higher-level coverage. The mark to market rule when pricing US government bonds is too restrictive.
There have been many “bank runs” in our history. Think about the movie, “It’s a Wonderful Life” where everyone runs down to their bank and tries to get their money out at the same time. Today, no one has to “run”, they just get on their phone and move their money. This means that crisis’ can occur exponentially faster. The good news is that these episodes can end faster as well. The end result of this current issue was a tremendous amount of cash moving to larger banks that were seen as more stable. The biggest beneficiaries were the banks deemed “too big to fail” during the last financial crisis. The Fed and regulators ultimately did what they were supposed to do. They acted as the lender of last resort and backstopped the bank’s depositors.
Why are the markets doing better with all the negative news? Interest rates have moved lower. Investors believe the Fed is close to being done raising rates and now actually expect the Fed to cut rates this year. Other reasons include corporate earnings remain strong, employment remains robust, housing is getting a bump as rates have fallen, and the consumer is still spending. One other big reason is the trend of inflation is still moving lower. In fact, we expect the next few months to look very good vs. last years comparisons.
Our take is we will still avoid the recessions pundits have been predicting for almost two years now. It appears that the October 12, 2022 low in the S&P 500 may have marked the bottom of the bear market. That being said, the banking crisis will result in more uncertainty and tighter credit (tougher to get loans). This will make the odds of the US entering a recession increase slightly.
As we navigate the current environment, we are on the look out for other dominos to potentially fall as a result of our much higher interest rate environment. We are also always looking for investment opportunities that present themselves when markets dislocate. As always, we feel liquidity and quality of your holdings will get us through and successfully achieve your financial goals.
I am a big fan of the TV quiz show Jeopardy. I have watched two or three times a week for the last 40 years. So, I thought a Finance category might be fun for our clients.
Finance for $200
Historically the best month of the year for the stock market
Finance for $400
The FDIC coverage limit per person in each banking institution
Finance for $600
If I request an extension of filing my taxes, when will I have to complete?
Finance for $800 (Daily Double)
What is “Fee-only” compensation?
Finance for $1000
The forward PE for S&P500 is 17. What is the PE if you remove the 8 largest companies?
$200 = What is April
$400 = What is $250,000
$600 = What is October 16, 2023
$800 = Fee-Only means you don’t sell products and 100% of compensation comes from fees paid by clients
$1000 = What is 13.1 x earnings for the mythical S&P 492 (Lord Abbott 3/24/2023)
We are here to help answer any of your financial questions, please call us!