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Volume 12, Edition 7 | March 6 - March 10, 2023

A Case Against Owning Individual Stocks

Doug Walters, CFA
This week’s spectacular collapse of two banks is a painful reminder to their shareholders that there is a better way to gain equity exposure than individual stocks.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

With the collapse of two banks this week comes a fresh opportunity to remind investors of the risks in owning stocks. Success is never guaranteed in investing, but there are common sense ways to get exposure to the stock market’s long-term returns while minimizing the risk of individual company implosions.

In the span of 48 hours, Silvergate Capital (SI), a go-to lender in cryptocurrency, and Silicon Valley Bank (SIVB), a go-to lender to technology firms, collapsed into receivership. While Silvergate was a crypto one-hit-wonder, Silicon Valley Bank was one of the top 20 commercial banks in the country not too long ago. In 2022, Forbes featured Silicon Valley on its list of America’s Best Banks. The collapse was swift and merciless. Such is the risk for stockholders. When things go badly, stockholders bear the brunt of the downside. If you owned Silicon Valley Bank stock yesterday, those shares are worthless today.

So why invest in stocks? Over time, investors willing to stomach the risk have been rewarded handsomely with attractive long-term returns. While it is difficult to avoid general equity market risk, it is easy to avoid the single-stock risk that Silvergate and Silicon Valley holders currently face. Exchange-traded funds (ETFs) are a great option. They trade like stocks, but like mutual funds, can contain many stocks and therefore provides some protection against “single stock risk.”

Stock ETFs come in many flavors today, providing better tools than individual stocks for expressing your market view. We prefer stocks with persistent proven factors like High Quality, Attractive Value, Price Momentum, and Small Size. There are ETFs for that. Others may prefer an environmentally friendly bias or high-income securities. There are ETFs for that.

Stock investing has evolved. Gone are the days when individual stocks were the gold standard for sophisticated portfolios. Today, ETFs are a better tool for wealth managers to implement their strategies.

3.6%

The unemployment rate rose but is still historically low

In Friday’s jobs report, unemployment rose to 3.6%, which was higher than expected, but still historically low. 311K new jobs was a higher print than analysts predicted.

Headline of the Week

Bad Bank(s) and Solid Jobs Cloud the Picture

Well, something finally moved the Fed and interest rates out as the lead story. The bad news is it took a bank collapse (or two) to do it. Silicon Valley Bank was taken over by the FDIC and served as a reminder that risk is present even in the allegedly safer corners of financial markets (see Doug’s comments). One interesting wrinkle is the extent of the impact of this collapse on the bond market. Stocks and bond prices have moved similarly. Friday saw some significant deviations from this trend. Bond prices moved higher while stocks largely sold off.

In newspaper parlance, the jobs report was moved “below the fold.” The much-heralded non-farms payrolls report showed resilient yet lower employment growth for February. There were mixed messages underneath the headline. The headline number was viewed as too high to alter the Fed’s thinking on interest rates, but the unemployment rate ticked up, as did pockets within labor force participation. Both upward metrics point to easing of the tight labor market conditions balanced against wage pressure in sectors of the economy still recovering from Covid lockdowns. Depending on next week’s CPI report, it could be a coin toss for how high the Fed raises rates at their next meeting.

The Week Ahead

The Inflation report and a rate decision from the European Central Bank are expected to be the prime market movers, though the start of NCAA’s college basketball March Madness will provide the entertainment.

The CP-Eye

This upcoming week’s Consumer Price Index (CPI) is the most important economic development.

  • With the Federal Reserve scheduled to make a rate decision the following week, this will be the star data point to swing to ½ or ¼ rate hike.
  • Experts are predicting a ½ percent jump in inflation for February and the annual inflation rate to come in at 5.5%, a tick down from the January number.
  • With banking sector developments this past week, the Federal Reserve may want to be conservative, but it will most likely point to the inflation print at crunch time.
  • While the CPI is the leading star of this drama, The Producer Price Index (PPI), out a few days later, will be a front-runner for supporting actor, and possibly a moving performance from Retail Sales report could stir the pot.

Old World Problems

The European Central Bank (ECB) also has a rate decision to make.

  • Expectations for a ½ percent hike are the base case right now.
  • Interestingly, Bundesbank (Germany’s Central Bank) head Joachim Nagel called for more aggressive action when Germany might already be in a recession.
  • As with all Central Banks, the ECB must balance fighting inflation and keeping the economy afloat.
  • Much attention will be paid to projections from the ECB and guidance on future hikes.

In other news…

The Oscars are on Sunday, and so is daylight savings. The NCAA College Basketball Tournament kicks-off mid-week, and Saint Patrick’s Day is on Friday.

  • I wish you the luck of shamrocks and the blessings of leprechauns!

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