Market Commentary For the week of March 20, 2023

Though a plethora of economic data was released last week, the main story continued to be the collapse of Silicon Valley Bank (SVB). However, we want to stress that this is different from 2008. SVB differed from a typical bank in that it had a concentrated customer base, with deposits from startup tech and healthcare companies that receive funding from venture- capital firms. Driven by a boom in funding during an era of near-zero interest rates, SVB’s deposits more than tripled between the end of 2019 and the first quarter of 2022, SVB in turn invested most of these deposits in fixed-income securities. As interest rates rose and venture-capital funding dried up, deposits declined sharply, forcing SVB to sell its fixed- income investments at a loss to raise cash.
The release of the Consumer Price Index (CPI) and Producer Price Index (PPI) were meant to be last week’s highlight, but it was overshadowed by the banking sector.¹

How do the banking collapse and Inflation data impact you?

The first piece of good news is that most banks currently have enough capital to absorb these losses, in large part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.
The second piece of good news is that inflation readings continue to fall. In the 12 months through February, the core CPI gained 5.5%. Representing the smallest rise since December 2021 and followed a 5.6% advance in January.¹
Similarly, core PPI showed its lowest print since March of 2021. Because the producer-centric index captures price shifts upstream of the consumer, it’s sometimes looked to as a potential leading indicator of how prices may eventually land at the store level. This means consumers could start to see some relief at the retail level due to lower production costs. ¹

The main thing that markets will be focused on this week is the Federal Reserve’s (Fed) rate hiking campaign. Had SVB and Signature Bank not failed, economists said both inflation and labor market data would be enough to prompt a faster 0.50% move from the Fed.

How does the bank collapse impact you?

Fed officials have two main choices when deciding how to fight inflation while also dealing with the U.S. regional bank crisis. They can either turn a blind eye staying focused on price stability, continuing to pursue rate hikes despite the risk that it could add more tension to the banking sector. Or they can hold for now to provide the financial system time to stabilize, even if it comes at the risk of keeping price pressures hot.
Ultimately, because of SVB’s and Signatures’ failures, this will likely lead to a tightening of financial conditions as banks become more risk averse leading to a slowdown in lending growth. Which means the Fed needs to do less of the heavy lifting to get to the same outcome.
Finally, some food for thought, In a matter of days, the market moved from pricing in three rate hikes and zero cuts for the rest of 2023 to pricing in one final rate hike and three rate cuts. The 2-year Treasury yield plunged 1%, recording its biggest five-day move since 1987. In the past 30 years, whenever the 2-year yield fell below the federal funds rate, it has signaled the end of fed hiking.¹

Market Index Returns as of 3/17/23	WTD	QTD	YTD	1 YR	3 YR	5 YR
S&P 500 TR USD	1.47%	2.41%	2.41%	-10.74%	19.69%	9.22%
NASDAQ Composite TR USD	4.44%	11.36%	11.36%	-15.54%	19.45%	10.21%
DJ Industrial Average TR USD	-0.11%	-3.35%	-3.35%	-6.34%	19.44%	7.33%
Russell Mid Cap TR USD	-2.03%	-1.53%	-1.53%	-12.92%	21.21%	6.24%
Russell 2000 TR USD	-2.57%	-1.70%	-1.70%	-16.03%	21.84%	3.05%
MSCI EAFE NR USD	-3.13%	2.64%	2.64%	-5.32%	15.81%	2.06%
MSCI EM NR USD	-0.28%	-0.25%	-0.25%	-12.80%	9.08%	-2.40%
Bloomberg US Agg Bond TR USD	1.43%	2.90%	2.90%	-5.61%	-1.67%	1.01%
Bloomberg US Corporate High Yield TR USD	-0.42%	1.44%	1.44%	-5.10%	6.29%	2.73%
Bloomberg Global Aggregate TR USD	1.65%	2.62%	2.62%	-9.03%	-2.63%	-1.31%

OBSERVATIONS

Both the major indices of U.S. stocks and global stocks were mixed as investors grappled with assurances from federal authorities that depositors would be protected, helping to calm nerves in the banking sector.
As a result, the tech-heavy NASDAQ returned +4.44%, beating both the S&P 500 and DJ Industrial Average.
Small caps underperformed their large cap peers with the Russell 2000 Index down -2.57% for the week compared to the Russell Mid Cap Index down -2.03% and the S&P 500 Index up +1.47%.
Bonds continued their positive trend, with yields again contracting significantly.
- As a result, the Bloomberg US AGG Bond index returned +1.43%, and Bloomberg Global AGG index +1.65%.

BY THE NUMBERS

Silicon Valley Bank (SVB): While the SVB collapse is a reminder of the unintended consequences that aggressive central bank tightening can create, it highlights the bank’s poor interest rate risk management and unique customer base. Most banks rely on a variety of sources for deposits, tend to be much more retail-oriented, and hedge their interest rate risk. SVB’s percentage of uninsured deposits (those exceeding the $250k FDIC insurance limit) was 88%. By contrast, JP Morgan holds 59%, Wells Fargo holds 37%, Bank of America holds 32%, and Citibank holds 31%.³

UBS to the Rescue: UBS came to the rescue of its long-time rival Credit Suisse yesterday. The acquisition was brokered by the Swiss government and at $3.3 billion dollars, represents a 99% decline in Credit Suisse’s price-per-share from its all-time highs. As one of the world’s leading financial centers, Switzerland has a lot at stake in this rescue operation. Credit Suisse has a 167-year-old history but has lost investor confidence after numerous scandals and high-interest rates. Credit Suisse’s clients have withdrawn over $100 billion over the past three months, and experts worried the bank teetered on the brink of collapse.⁴

Economic uncertainty has taken a toll on consumer sentiment. The University of Michigan’s Index of Consumer Sentiment fell for the first time in four months in March, falling to 63.4 from last month’s reading of 67, according to preliminary data.⁵

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