Equity markets this past week seem to be moving on from the tumult caused by some regional banks earlier this month. The Dow Jones increased 1.18%, the S&P up 1.39%, and the NASDAQ 1.66%. Fixed income markets have also continued to rally this past week, with 2-year and 10-year yields moving lower by 16 and 9 basis points, respectively, indicating a continued flight to quality amid concerns over regional banks. Additionally, the Federal Reserve decided unanimously to raise rates by 25 basis points last week, keeping on track with the prior hike in February and slowing from the 50-basis point hike in December. In general, we believe the Fed is in a tough position between balancing actions in response to regional bank failures, targeting price stability, and quelling inflation. Congress will also discuss activity surrounding the banking sector and how to prevent such failures in the future. At the time of this writing, First Citizen Bancshares, Inc., a Raleigh, NC bank holding company, agreed to acquire Silicon Valley Bank, including $56 billion in deposits and $72 billion in loans.

Global Economy

As mentioned, the Federal Reserve raised rates by a quarter-percentage point last week on March 22nd, marking the ninth time in a row that they have hiked. This brings the Fed Funds range between 4.75% and 5.00%. Members of the Fed’s rate-setting committee have made it clear that they believe higher rates will be necessary to quell inflation. Policymakers are anticipating another 25-basis point hike by the end of the year. This hike comes after calls for a pause due to the collapse of both Silicon Valley Bank and Signature Bank earlier this month. However, Treasury Secretary Yellen has implied that these pressures have eased, and large withdrawals have “stabilized.” Chart 1 below of the Federal Funds Rate since 1994 shows that current rates are still a way off from their peak of 6.50% in mid-2000.

The House and Senate committees that oversee banking are holding back-to-back hearings this week to examine regulatory lapses that contributed to the failing of Silicon Valley Bank and Signature Bank. Those testifying at the hearing include Federal Deposit Insurance Corporation Chairman Martin Gruenberg, Federal Reserve Vice Chair for Supervision Michael Barr, and the Treasury Undersecretary for Domestic Finance Nellie Lang. These hearings aim to try to understand what caused the two banks to fail, as well as contain further damage to the economy and reinforce confidence in the banking system. However, there will also be a discussion about whether tighter banking sector regulations are necessary. Keep in mind that, at the time of its failure, 94% of Silicon Valley Bank’s deposits sat above the FDIC’s $250,000 limit, which will likely become a point of scrutiny in these hearings.

What to Watch

• Monday, March 27^th
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.534/gal.)

• Tuesday, March 28^th
  • Case-Shiller Composite 20 Home Price Index YoY at 9:00AM (Prior: 4.66%)
  • Case-Shiller Home Price Index: National at 9:00AM (Prior: 297.08)

• Wednesday, March 29^th
  • U.S. Pending Home Sales MoM at 10:00AM (Prior: 8.13%)
  • U.S. Pending Home Sales YoY at 10:00AM (Prior: -24.10%)

• Thursday, March 30^th
  • U.S. Gross Domestic Purchases Price Index QoQ at 8:30AM (Prior: 3.60%)
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 191,000)
  • U.S. Real GDP (Gross Domestic Product) QoQ at 8:30AM (Prior: 2.70%)
  • US Total Vehicle Sales at 10:30AM (Prior: 16.20M)
  • 30-Year Mortgage Rate at 12:00PM (Prior: 6.42%)

• Friday, March 31^st
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index MoM at 8:30AM (Prior: 0.60%)
  • U.S. Core PCE Price Index YoY at 8:30AM (Prior: 4.71%)
  • U.S. PCE Price Index YoY at 8:30AM (Prior: 5.38%)
  • U.S. Personal Income MoM at 8:30AM (Prior: 0.58%)
  • U.S. Personal Spending MoM at 8:30AM (Prior: 1.76%)
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 63.40)
  • U.S. Crude Oil Production at 3:30PM (Prior: 375.14M bbl.)

The fallout from Silicon Valley Bank and Signature Bank’s failures is under control as the Federal Reserve and Congress act to understand and contain it. The Fed is committed to raising rates as it sees necessary to continue fighting inflation despite banking issues, but we believe that they are nearing the end of their hikes before a pause to digest data. The outcome of the upcoming congressional hearings is top of mind—will Congress reenact some of the changes made to Dodd-Frank in 2018? Despite all of this, we still believe in staying the course when it comes to investing. Trying to time the market means you must be correct at two points: first when you exit the market, and second when you attempt to reenter the market. Please reach out to your financial professional at Valley National Financial Advisors.

Equity markets posted mixed results last week as issues surrounding U.S. Regional Banks continued to roil investors. Further, Swiss banking giant Credit Suisse, beleaguered for decades, finally found a merger partner in fellow Swiss Bank UBS. While seemingly good news on the surface, investors took this news as more of a “canary in a coal mine” signal that further unwelcome news could follow in the banking sector. As a result, there was a large flight to quality trade as investors scooped up U.S. Treasury Bonds. By week’s end, the bellwether 10-year U.S. Treasury Bond had moved lower by 16 basis points to close the week at 3.39%. Just three short weeks ago, the rate on the 10-year U.S. Treasury was 4.06%. Last week, the Dow Jones Industrial Average returned -0.15%, the S&P 500 Index moved higher by +1.43%, and finally, the NASDAQ rallied higher by +4.41%. 

It will take some time for 2022’s interest rate tightening to be completely felt in the economy, but the direction is correct – lower inflation. The Federal Open Market Committee meets this week. Several Wall Street analysts are calling for a pause in further rate hikes, given the recent inflation reports and the continued economic uncertainty surrounding the banking sector. While Fed Fund Futures are still pricing in a +0.25% rate hike this week, we at VNFA certainly believe a pause is more appropriate.

Policy and Politics 

Several factions in the U.S. House and the U.S. Senate call for the Federal Deposit Insurance Corporation to guarantee all deposits at U.S. Depository Institutions (banks, savings and loan associations, and credit unions) rather than only to the current limit of $250,000. A change in the FDIC limit would require an act of Congress, which is possible should a crisis in confidence in the banking sector continue.

 What to Watch 

• Monday, March 20^th  
• U.S. Retail Gas Price at 4:30PM (Prior: $3.568/gal.).

• Tuesday, March 21^st  
• U.S. Existing Home Sales at 10:00AM (Prior: 4.00M).
• U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 10.82M).

• Wednesday, March 22^nd  
• Target Federal Funds Rate Upper Limit at 2:30PM (Prior: 4.75%).

• Thursday, March 23^rd  
• U.S. New Single-Family Houses Sold at 10:00AM (Prior: 670.00K).
• 30-Year Mortgage Rate at 12:00PM (Prior: 6.60%).

Wall Street insiders, executives, regulators, and lawmakers have managed to quell the current banking problem, which thus far has been limited to very few banks specifically catering to the technology and crypto world. Banks remain very well capitalized, especially compared to the 2008-08 Global Financial Crisis, see Chart 2 below from the FDIC & Bloomberg. Contagion is a tricky beast, and the markets need to see just the right amount of government and private intervention before taking a directional turn. We remain cautiously optimistic about the equity and fixed-income markets for 2023. Watch for cues from Chairman Powell this week on whether we get a pivot in policy this year. 

Despite last week’s dramatic sell-off across all equity market sectors, the –4.55% drop in the S&P 500 Index fails to tell the week’s full story. The Dow Jones Industrial Average was down –4.44%, and the NASDAQ fell –4.71%, in concert with the broader S&P 500 Index. The stock market’s decline directly implied strong jobs data released Friday and very hawkish comments made by Fed Chairman Jay Powell earlier in the week during his congressional testimony. By the end of the week, Silicon Valley Bank, a bank catering to tech start-ups, was on the brink of failure due to losses on bond reserve holdings, customer withdrawals, and shrinking liquidity. The FDIC seized Silicon Valley Bank, and by late Sunday evening, a new Fed liquidity facility was created and announced that depositors at Silicon Valley Bank would be made whole. We will discuss each of these events below. Meanwhile, in a massive flight-to-quality move, the 10-year US Treasury fell 28 basis points to close the week at 3.70%. 

US Economy 

Fed Chairman Jay Powell testified to congress for two days, first to the U.S. House of Representatives and secondly to the U.S. Senate. Chair Powell was adamant about his objectives to quell still hot-running inflation at these hearings. This message was factored into the markets and moved expectations on further Fed interest rate hikes to moves in the +0.50 – 0.75% at the March 21-22 meeting next week. As expected, markets reacted negatively to even higher than previously expected interest rates as higher rates increase funding costs, slow the economy, and increase the overall cost of expansion for corporations. This turn of events was a solid negative for markets, but the unwelcome news continued.

• As mentioned above, last week Silicon Valley Bank, the so-called one-stop shop for technology start-ups in the U.S., failed as losses on its bond holdings created a liquidity crisis as depositors lined up to withdraw funds created an old-fashioned “run-on-the-bank.” Following this collapse, another tech-central bank, Signature Bank, also failed. These bank failures, while small by bank standards, prompted the Fed, the FDIC, and bank regulators to:
  • Seize Silicon Valley Bank and Signature Bank
  • Label Silicon Valley Bank and Signature Bank as new “Systemic Institutions.”
  • Guarantee depositors’ access to their accounts, even those over the $250,000 FDIC limit.
  • Create a new Bank Term Funding Program, which will provide liquidity to U.S. depository institutions by allowing them to pledge U.S. Treasury securities to the facility as collateral at PAR value. (This move by the government negates current book losses on U.S. Treasury holdings of banks and provides needed liquidity.)
  • This special Bank Funding program smooths/negates the duration risk that bank bond portfolios had as their holdings have lost money due to the rise of interest rates over the past year (remember, as interest rates rise, bond prices fall).

• Certainly, these actions by the Fed and FDIC have stabilized the current issue impacting the banking sectors. These bank failures, again small by bank standards (Silicon Valley Bank assets were ~$200 billion compared to JP Morgan Chase assets ~ $2.6 trillion), point to a crack in the technology start-up funding world. Technology start-ups and start-up companies provide new jobs across all markets; funding these ideas is critical to their success until a replacement to funding institutions like Silicon Valley Bank are found, whether venture capital, private equity, or large banks like JP Morgan or Wells Fargo. This nascent industry will face headwinds. 

Policy and Politics 

There will be a lot of naysaying and gnashing of teeth this week in Washington as regulators, Fed officials, and Law Makers clash and cross-blame each other for 1) allowing banks to fail at all and 2) permitting yet another bailout by the Fed of another financial institution.

What to Watch 

• U.S. Core Consumer Price Index YoY for February 2023, released 3/14/2023, (prior 5.55%).
• U.S. Inflation Rate for February 2023, released 3/14/2023, (prior 6.41%).
• U.S. Core Producer Price Index YoY for February 2023, released 3/15/2023, (prior 5.37%).
• U.S. Building Permits for February 2023, released 3/16/2023, (prior 1.339M). 
• U.S. Index of Consumer Sentiment for March 2023, released 3/17/23 (prior 67.00).

A massive batch of economic data is on deck for this week. Early in the week, important inflation information will be released, which will help gauge whether the Fed is impacting hard-hitting inflation that continues to hurt businesses and consumers. Mid-week building permits will add information about the housing industry and whether a spring bounce is on deck. Lastly, we will see how consumers feel as U.S. Sentiment for March 2023 is released.

In a conversation with our Founder and Chairman, Tom Riddle, over the weekend, we called on his previous experience as a bank examiner working for the U.S. Treasury Department. Tom recalled his methods for judging a bank’s health, “One does not only look at a bank’s balance sheet. A far more accurate reading is to evaluate a bank’s growth, or decline, of its net interest income.” “By this measure, banks we invest with at Valley National Financial Advisors are not those with declining or poor net interest income. However, Silicon Valley Bank would have been on such a list.” Tom continued, “banks with poor net interest income growth exhibit very unusual balance sheet characteristics such that they are lending money and offering deposit rates at levels that are higher than their investment returns.” Tom closed with, “It is a stressful time for banks that have ventured away from traditional banking.”

• Looking beyond the Silicon Valley Bank meltdown, we have a busy week ahead with economic data, regulators, and lawmakers all helping to navigate the markets. The Fed may use this issue to slow or halt further interest rates, but inflation will need to continue to cool for this to happen. Meanwhile, corporate America is experiencing an unexpected earnings tailwind from cost cutting, supply chain stabilization, a declining dollar, and increased demand from China. Don’t hesitate to contact your financial advisor at Valley National Financial Advisors for help or guidance.