Investing
Markets holding on despite warning signs
Following the failures of Silicon Valley Bank and Signature Bank, markets are seeing heightened volatility. Bank stocks saw tremendous pressure but the broad U.S. stock market held up relatively well.
Following the failures of Silicon Valley Bank (SVB) and Signature Bank, markets are seeing heightened volatility.
On Monday, bank stocks saw tremendous pressure but (perhaps surprisingly) the broad U.S. stock market held up relatively well. Meanwhile, bond yields continued to decline as investors sought safer havens – 2-year Treasury yields have plummeted over 100 basis points to ~4% in just the last three trading days, the largest downward move seen since the 1980s.
At this point, there are still as many questions as there are answers. First, let’s recap what we know so far (as of Monday afternoon):
- Silicon Valley Bank came into this in a tough spot versus other banks.
Michael Cembalest, our Chairman of Market and Investment Strategy, noted a number of factors in his piece last week that put SVB at risk. Those factors included less sticky deposits, a business concentrated in early stage technology and health care companies, and a large book of securities investments that lost value as the Fed raised rates. Some other small regional banks – particularly those with similar deposit dynamics – are also facing pressure. Crypto-friendly banks Silvergate and Signature Bank have also failed, leading to broader worry of what comes next. - Policymakers have stepped in to stem contagion risks.
Said another way, U.S. authorities have already taken actions to prevent this from becoming another economy-wide financial crisis. This past weekend, the Fed, Treasury and FDIC issued a joint statement that all depositors with money at both SVB and Signature Bank would have full access to their money on Monday, regardless if their deposits were insured or not. They also rolled out other support measures to help other banks should they face similar pressures. The hope is that these efforts bring a sense of security to the banking system.
As for what it means for the broader financial system?
We don’t yet know full scale of the impact of the recent bank failures, or how effective this weekend’s emergency measures will be at restoring confidence. At the very least, though, the steps taken by policymakers suggest that they are taking this issue seriously.
Looking forward, we think the Federal Reserve’s next move will be important. SVB and others’ fallout highlights the kinds of impacts that tighter monetary policy can have. Markets have quickly moved to take current dynamics into account, and are now anticipating a less aggressive path ahead for the Fed (even pricing in cuts by the end of the year).
Here are a few things investors might consider today:
- Stay focused on your long-term plan. Markets can always have a bad day, week, month or even year, but over the longer-term, diversified portfolios can help lower volatility. What’s more, history shows that the best days and the worst days for the market tend to cluster together.
- This is when core bonds and portfolio diversification prove their worth. The swift move lower in yields over the last few days reminds us of the shield bonds can provide as the growth outlook worsens. We continue to focus on high quality, investment grade credit as a defensive position in diversified portfolios.
- Focus on quality companies. We are focused on companies that are flush with capital, backed by secular growth and that offer better relative value. For instance, we think U.S. sectors like health care and industrials may fare better than financials in the months ahead.
We’ll be back with more updates on the situation as they unfold – come back and visit us throughout the week to stay informed.
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