March Market Recap
March was a volatile month that saw dramatic changes in the view of the economy. At the beginning of March, there were expectations that the Federal Reserve would continue to raise interest rates more aggressively throughout the year than was previously anticipated. Then, out of nowhere, we experienced the second-largest bank failure in our nation’s history, (the largest since 2008’s failure of Bear Stearns).
Silicon Valley Bank (SVB) was caught up in an issue that many investors were facing in 2022. The dangers of rising interest rates against long-duration bonds. For the past 40 years, interest rates have been falling relatively steadily. Beginning in March 2022, the Federal Reserve began to raise interest rates to combat inflation. This is extremely detrimental to long-term assets. When a bank receives deposits from their customers, they will try to generate earnings for themselves by using the money to give out loans or by purchasing US Government Bonds. During the early stages of COVID, SVB received an influx of deposits from the Covid Relief bills that came from Congress. When the influx came in, the bank had to find a way to generate earnings from the money. They turned to Long Maturity treasury bonds. This was incredibly irresponsible as owning these types of bonds is prone to interest rate risk when rates are rising. What did the fed do? They raised rates aggressively throughout 2022.
At this point in the story, SVB no longer has $1 for every deposit, they have 10-30% less than that because the value of the bonds is worth 10-30% less. Needless to say, the word got out and SVB experienced a “bank run”. Customers wanted their money out as they didn’t feel the bank could sufficiently protect their deposits. The cycle continued, and eventually, SVB didn’t have enough cash to cover the withdrawals.
Why is this important? Because these have been some of the first cracks that have followed from the Federal Reserve raising interest rates so aggressively. The expectation is now that the Federal Reserve will be forced to slow rate hikes down significantly or to stop raising altogether. As for the Markets, this has explained the recent market recovery of the NASDAQ 17.26% Year to Date. On the other side of the market, Value (which held up much better during the Market Recover in 2022 than the NASDAQ), was only up 1.42%.
As we look at the next month and beyond, we will need to see whether the Fed will stop raising rates, will the economic data prove to show that the economy is slowing (and thus inflation), AND what will corporate earnings look like. We shall see!