Seeing the Forest for the Trees
Doug Walters
Investors appear to have digested Silicon Valley Bank’s collapse without too much indigestion. Financials have been under a microscope, but it’s time to make sure we can see the forest from the trees.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
March madness was not just on the court this week. It was also a wild week for market watchers as investors continued to digest the fallout from the collapse of some banking sector darlings. In the end, the US stock market finished the week in positive territory.
The collapse of Silicon Valley Bank (SIVB) put a spotlight on banks, with market-goers trading in their magnifying glass for a microscope in their scrutiny of the sector. But the extremely close interrogation in some cases did not allow them to see the forest for the trees.
It seems increasingly likely that SIVB and the handful of other failed banks are unique in their mismanagement of the higher rate environment (see Headline of the Week). The media has lazily grouped several companies in headlines that don’t belong together. A case in point is Credit Suisse which was struggling long before the Fed began raising rates. And then there are financial custodians, like Charles Schwab (our primary custodian), who have seen their shares decline dramatically in recent weeks. This has nothing to do with SIVB. Schwab is well capitalized, its assets are predominately FDIC insured, and it does not suffer from the customer concentration that plagued SIVB. For Schwab, higher Treasury yields have caused clients to shift assets away from its lucrative cash products. That eats into Schwab’s profitability, which is a challenge for their management and not a problem for their clientele. Said another way – your assets are safe at Schwab.
As we discuss below, rate increases are painful by design, and additional shoes may drop. But investors need to stay above the fray, and the positive market reaction this week suggests they are doing just that. As we discussed last week, diversification is key to riding out market volatility. Expressing your views in well-designed exchange-traded funds (ETFs) rather than individual stocks is a great first step and can help protect against the single stock risk like what we have witnessed in Silicon Valley Bank.
Chance of another 25bps rate increase
All eyes will be on the Fed next week as we find out of recent banking sector turmoil changes their calculus on continuing rate increases.
Headline of the Week
Wall Street loves a turn of phrase…
Higher for longer… Can’t fight the Fed…
…to name two. But the most appropriate at this moment (paraphrased), “the Fed raises rates until something gets broken.” Well, mission accomplished; Silicon Valley Bank, Silvergate, Signature Bank, First Republic, and maybe even Credit Suisse. Now this breakage did come about because of the Fed, but higher rates were a material catalyst that exposed largely hidden (in plain sight) risks.
Before last weekend, headlines were dominated by various economic reports and their impact on the Fed’s rate path. Despite significant rate increases, the economy proved resilient. With this week’s breakage, some new thinking could take hold that sees banks, consumers, and other businesses become more risk averse with ramifications for the broader economy. The Fed’s goal all along was arguably to convince the economy to slow down, to take the foot off the gas. Hopefully, that is the result rather than having the foot slam on the brakes.
The Week Ahead
If the last two weeks have given investors bank-related anxiety, don’t expect that to change, as several major central banks will have to decide on interest rate moves this week. The overall number one seed is the Federal Reserve, but the Cinderella pick to make big noise is the Swiss National Bank.
Top Seed
Chairman Powell and the rest of the Federal Reserve will have a tough matchup. They face two foes, inflation and bank failures, next week.
- While inflation seems to be on the back burner, at least in this meeting, the central bank will be forced to assess what they broke (see above).
- Overly optimistic traders are betting that the bank failures and Credit Suisse problem will cause the Federal Reserve to pause the hikes as early as this meeting.
- Market-implied indicators assign a 78.2% chance of another 0.25% move, but the other 21.8% is a no-hike scenario.
Perennial Contenders
The People’s Bank of China and the Bank of England are always in the mix to make a run at headlines, but this month is not their month.
- The Bank of England (BOE) signaled it might be done tightening or at least very close to the end.
- The UK will have a timely inflation print before the Thursday meeting. That should be the deciding factor.
- The Bank of China (BOC) probably will not do anything with rates but is always looking for ways to juice the economy in other ways.
- The BOC has had some good economic trends to savor recently, so they may have a pass this time.
The Underdog
Rarely do we pay attention to the Swiss National Bank (SNB), but since they are outside the European Union’s Monetary Union, they do have an independent central bank.
- The focus will certainly not be on interest rates.
- Credit Suisse’s (CS) solvency issue forced the bank to dish out a $54 billion emergency fund to backstop the cratering bank.
- Rumors of what the SNB will face include a break-up of the global bank or a forced merger with another Swiss financial goliath (UBS).
- This could be the SNB’s “one shining moment,” or this could bust some brackets for the continent.
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.
OverviewDisclosures
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.