Knowing is Half the Battle
Worried about the current banking crisis? No need if you understand where the risks reside and how to avoid them.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
The banking sector woes continued this week (at least for some banks). First Republic Bank was seized by federal regulators and then swept up by JPMorgan Chase, prompting investors to punish other regional banks like PacWest. The episode has resurfaced fears among some about the safety of their cash and investments. We take a look at where risk does and does not reside.
Are my investments safe at my custodian?
Your custodian is where your investments physically reside, like Charles Schwab or Fidelity. Your investments on these platforms are yours and yours alone. The value of your assets can go up and down, but as long as you do not take out margin, your custodian has no legal right to touch your shares. Short of a criminal act, you have nothing to worry about. And even then, custodians will carry insurance to help cover such unlikely circumstances.
How about my regional bank stocks?
Whether it is bank stocks or any other security, your purchase involves some element of risk. Theoretically, the value of any stock can go to zero. Are regional banks inherently risky right now? Most of these banks are well-capitalized and fundamentally sound. Yet individual banks always face the risk of a bank run – whether justified or not. In the wake of recent bank theatrics, depositors are wary and quick to act. So risks are elevated. There is a solution… diversification. With the advent of a wide variety of exchange-traded funds (ETFs), you can target the bank exposure you want without the need to take on concentrated individual stock risk.
And what about my cash in these banks?
If you have an FDIC-insured account with less than $250K deposited, then your money is safe. Worst case, if your banking institution fails, your money could be tied up temporarily while awaiting the FDIC insurance payout. If you have a need for more than $250K held in cash, spread it amongst multiple banks or use a solution like Advisor.Cash to spread it out for you.
Bank seizures are admittedly unnerving. But understanding where the real risks reside will allow you to navigate the current environment with peace of mind.
Record low unemployment
Headline of the Week
While the 253,000 jobs number grabbed the headlines, the 3.4% unemployment number represents the lowest reading since 1969. These headlines were enough for the stock market to launch what is widely viewed as a “relief rally.” As in, markets were relieved the number was not bad, given dour economic reports earlier in the week. However, bond yields rose in anticipation of more rate hikes. And there was evidence of wage pressure in the report. Reading the economic tea leaves is always a challenge, and this time is no different.
The Fed will get to review one more jobs report before their next meeting, so handicapping the “pause” is difficult.
The Week Ahead
Most eyeballs will shift to the United Kingdom next week, with only a few marquee earnings releases and a Consumer Price Index (CPI) at home to stir the pot.
While the coronation of the new Monarch will dominate the news world this weekend, the Gross Domestic Product (GDP) and a rate decision from The Bank of England will dominate the financial markets next week.
- Inflation is slowing, but less than expected, paving the way for a 12th consecutive hike from the Bank of England to 4.5%.
- The market-implied odds going into the weekend call for 85% odds of a quarter of a percent move.
- Last quarter the GDP for the U.K. came in just positive, avoiding the dreaded recession.
- Since that last report, economic numbers coming in from the U.K. have been more positive than even the most optimistic predictions, which should translate to an expansion in the first quarter.
- Current predictions are for 0.4% expansion, despite the stubbornly high inflation.
With the latest rate hike in the books, the Consumer Price Index will start the pause debate next week.
- While the previous monthly report of 5% annual inflation was a drop from the 6% number two months ago, the core CPI, which excludes food and energy, moved higher by a little bit.
- This report will need to show concrete evidence that inflation is on a downslope to increase the odds that the Federal Reserve will no longer hike rates.
- The current consensus is that the headline number will come in at 5% again, but the core CPI is expected to drop down slightly.
- The Producer Price Index (PPI), which measures inflation on the business level, has already dropped sharply to the 3.4% level in the last report, but the consumer seems to be more stubborn at this point.
Keep an Eye on the Mouse
Earnings Season is coming to an end, with around 85% of the S&P 500 already reported.
- So far, 79% of the S&P 500 companies have topped expectations. However, the reactions to besting estimates have been more muted than the big selloffs in the companies that miss numbers.
- Next week’s biggest name on the calendar is The Walt Disney Co. (DIS).
- With job cuts and “turnarounds,” this is expected to be a messy quarter for Bob Iger, who is reprising his old role as CEO of Disney.
- McKesson Corp. (MCK), PayPal (PAL), Toyota Motors (TM), AirBnB (ABNB), and Robinhood Markets (HOOD) are the other popular names reporting next week.
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