Drone aerial of the spectacular South Australian Southport Onkaparinga River mouth estuary and coastline.

Markets have been turbulent since March roared in, rattling investors in two different ways. First was the uncertainty driving the inflation debate: Was the economy still overheating, or nearing recession? Already shaken, stock markets were then hit by two rapid bank failures. Investors worried about whether worse might lie ahead. Was the economy heading to the brink of another financial crisis?

Intervention by regulators and the Federal Reserve (Fed) calmed markets somewhat, as of the time of writing 72 hours later. Still, the most substantial bank failures since 2008 have many investors on edge. We understand – the global financial crisis may be 15 years behind us, but many people were scarred by the contagion, wealth destruction and job losses that were its hallmarks.

We expect bad months – even bad years. In one of its most volatile years, the market plunged over 40%. Another year, stocks soared 60%. Yet a blended stock-bond portfolio hasn’t suffered a negative return over any five-year rolling period.1 Further, in an average year, the stock market sees a close to 15% peak-to-trough decline. Currently, the year-to-date drawdown is 8%. While drawdowns are never comfortable, what we are seeing in markets is, at the surface, normal.

So while we look at the dynamics currently in play and consider what they might mean for you, keep that long-term perspective in mind.

Here are our three key takeaways.  

Takeaway #1: Silicon Valley Bank and Signature Bank were different

The crises at Silicon Valley Bank (SVB) and then Signature Bank ignited in investors a fear of contagion – that many other regional banks could follow.

But SVB and Signature Bank were different. They had unusually high concentrations of large deposits – far above the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC). And in the case of SVB, almost all the depositors were venture funds and the businesses they backed.

As Chairman of Market and Investment Strategy Michael Cembalest explained in his Eye on the Market and again last week, SVB sourced less than 10% of its deposits from retail clients, who are viewed as “stickier,” meaning far less likely to move their money than corporate or institutional depositors.

SVB also had a large book of securities investments that lost value this past year as the Fed raised rates, and the value of the bank’s long-term bonds declined.

Uninsured deposit balances were higher at SVB and Signature

% of bank deposits above FDIC guarantee threshold

Chart titled: Uninsured deposit balances were higher at SVB and Signature

Source: JPMAM, JPMorgan IB. Data as of Q4 2022.

The Fed, the FDIC and Treasury took actions to make all depositors whole and provide liquidity to the banking system. Those lending facilities ought to help avoid some of the worst-case scenarios.

Banks will probably be more conservative with their lending practices from here. That could lead banks to pull back the amount of credit they provide to small and medium-size businesses, which could restrain economic growth. At the same time, conservative lending practices can act like a Fed rate hike, “tightening” money policy. That might persuade the Fed to opt for a less aggressive path for interest rates.

Takeaway #2: The tech recession is here. That means it’s time to look for opportunity

SVB’s other distinguishing factor is that deposits were highly concentrated in the technology and health care/life sciences spaces. Signature Bank, for its part, had a focus on the crypto sector. In the case of SVB, in excess of one-third of its deposit base was from early-stage tech and health care companies.

Such companies are often (as yet) unprofitable, speculative and digitally enabled. They soared during lockdowns, when lives moved online and interest rates were extremely low. But now, under the opposite conditions (public life reopening, the quickest rate hikes in a generation), investors are far less enthusiastic, capital markets have largely been closed to them, and fundraising has become difficult. Their very viability was at stake, as they burned cash without fresh fund inflows.

As noted, we don’t see this scenario at other regional banks. And that leads us to a second key point: SVB is in many ways the latest (and largest) example of the tech recession that has been unfolding over the last six months.

According to tracking from layoffs.fyi, 481 tech companies announced headcount reductions just this year. But there are some tentative signs that the tech layoff wave may have crested. As the chart shows, the number of tech employees laid off seems to have peaked in January.

The tech layoff wave may have crested

# of employees laid off & # of companies with layoffs

Chart titled: The tech layoff wave may have crested

Source: layoffs.fyi. Data as of March 14, 2023.

It has been a rough stretch for the technology complex in general, but it may be time for investors to start to sort through the wreckage. We expect to see opportunities in businesses with leaner cost structures and sustainable business models that may be valued at a discount.

Takeaway #3: The latest jobs report was not too hot and not too cold

The irony of the SVB failure is that it occurred on the same day that investors got a “goldilocks” jobs report for the month of February. The U.S. economy added 311,000 jobs in February, while wage growth ticked down to just a 0.2% month-over-month increase. Over the last three months, the economy has gained an average of 350,000 jobs per month with wage growth a modest 3.5%, consistent with the pace in 2019.

Rate hikes have caused some damage in the real estate, finance and technology sectors, but Main Street continues to chug along without creating excess wage growth.

Wage growth easing from highs

Average hourly earnings, SA, 3-month % change annualized

Chart titled: Wage growth easing from highs

Source: Bureau of Labor Statistics, Haver Analytics. Data as of February 28, 2023.

What do we see ahead? The turmoil in the banking sector will likely curtail new lending, and thus economic growth and inflation. The Fed may not have to raise rates quite as far as we had thought just a few weeks ago. The bad news: it probably also raises recession risks.

Keep things in perspective

When markets are volatile, we believe it is important to remember a few things.

  • Stick to your plan. One of the most important steps in investing is designing a plan and a portfolio to match it. Understanding the purpose of an investment portfolio and the tools that you use to achieve outcomes can help you make better decisions in uncertain times.
  • Market volatility tends to cluster. Our research shows that seven of the 10 best days for the equity market over the past 20 years have occurred within 15 days of the 10 worst days. If you missed just the 10 best days, it would have reduced your total return by 4% per year, relative to staying invested.
  • Focus on the long term. Markets can have bad days, weeks and years. But over a longer time horizon, we can be much more certain about the range of possible outcomes. A 50/50 portfolio of stocks and bonds has never delivered a negative total return over a five-year time horizon. Equities have always been positive over a 20-year horizon.

Long term returns have been less volatile

Rolling annualized total returns, 1950 – 2022

Chart titled: Long term returns have been less volatile

Source: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are rolling monthly returns from 1950 to 2022. Stocks represent the S&P 500 Shiller Composite, and Bonds represent Strategas/Ibbotson government bonds for periods from 1950 to 2017, then Bloomberg Finance L.P. Barclays U.S. Treasury Total Return index from 2017 to 2022. 50/50 portfolio is rebalanced monthly and assumes no cost.. Analysis is based on the J.P. Morgan Guide to the Markets – Principles for Successful Long-term Investing. *Actual worst 5-year rolling return of hypothetical 50/50 portfolio: -0.068%. Data as of December 31, 2022. Past performance is no guarantee of future results. It is not possible to invest directly in an index

While there could be more strain ahead, policymakers have the tools to mitigate a great deal of risk and point to a clearer path forward. Coming back to that long-term mindset can do the same for you.

For more information, please reach out to your J.P. Morgan team.

*The Bloomberg Barclays U.S. Treasury Total Return Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.



Sources: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibotson, J.P. Morgan Asset Management. Returns are rolling monthly from 1950 to 2022. Stocks represent the S&P 500 Shiller Composite; bonds represent Strategas/Ibotson government bonds for 1950–2017, then Bloomberg Barclays U.S. Treasury Total Return Index to 2022. A 50/50 stock-bond portfolio is rebalanced monthly and assumes no cost. Analysis is based on the J.P. Morgan Guide to the Markets—Principles for Successful Long-Term Investing.


Past performance is not a guarantee of future results.

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