Last week was a wild and rocky one on Wall Street. Bank run drama in Silicon Valley, jobs growth (again!), and a persistently hawkish Fed all contributed to the headlines. There was no shortage of fireworks, and major U.S. equity indexes markets fell sharply. In fact, the S&P 500 fell to levels not seen since January.
A Note of Caution
Given the enormity of the Silicon Valley Bank collapse, I believe it’s important to share related insights and context in this email. But I do want to note that this situation is constantly evolving, so keep in mind that there may be some new developments I’m not covering in this email.
I encourage you to read more about minute-to-minute developments in news sources like CNBC, The Wall Street Journal, and The New York Times.
Market Silicon Valley Bank
Venture capitalists and tech startups felt pain last week as Silicon Valley Bank became insolvent, sparked by the company’s need for liquidity, which resulted in an old-fashioned bank run.
The majority of the forty-year-old institution’s clients are venture capitalists and tech startups. The California Department of Financial Protection and Innovation (DFPI) took possession of the bank last week and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver.
SVB and the ensuing fallout is an ongoing story. The latest information shows that the U.S. government has indeed stepped in and will backstop depositors and financial institutions associated with Silicon Valley Bank. This occurrence is reminiscent of the Too Big to Fail phenomenon from 2008.
SVB Market Effects
There were, of course, chain reactions. For example, on Saturday, Etsy sent messages to sellers informing them that their payouts were delayed. Notable companies that have exposure to SVB include Roku, Etsy, Roblox, and Vimeo.
CNBC’s Jim Cramer is calling the bank’s collapse extremely deflationary. However, understand that not even a month ago, Cramer suggested SVB as a buy on CNBC. Yikes.
Rate Policy Impact?
For a glass-half-full perspective on SVB, the odds of a 50-basis-point increase at the March meeting fell precipitously last Thursday, reverting to a higher probability of a 25-basis-point hike.
Per the CME FedWatch tool, the odds further shifted as of Monday, with probabilities showing a 76.8% probability of a 25-basis-point hike, a 23.2% chance of no rate hike, and a 0% chance of a 50-basis-point hike at the March 22nd meeting. The data is dynamic and is accurate as of the last check.
For banking products, FDIC provides protections up to certain limits. Many of SVB’s clients were large tech companies that most likely exceeded the limits, but the latest news does indicate that the U.S. government will come to the rescue.
Government Bond Yields Drop
Holy flight to safety. Investors flocked to treasuries at a frenzied pace last week, sending treasury yields lower across the curve.
This sharp drop in yield translates to the mood of the market last week, which was informed by SVB events that rushed investors into safe-haven plays like treasuries and the fact that the Fed may have to rethink sharp rate hikes and/or the “higher for longer” narrative.
Folks are now chomping at the bit to see how the narrative plays out this week regarding the handling of SVB and any Fed/government involvement. We also get Consumer Price Index (CPI) data Tuesday.
Jobs Growth (Again!)
Federal Reserve Chair Jerome Powell has broadcasted that the Fed’s rate hike policy will be data-dependent. Nonfarm payrolls for February came in above expectations again, showing 311,000 jobs created versus 225,000 expected. Rising interest rates are intended to cool job demand, yet employers continue to add workers at a rapid pace.
Measuring market reaction to the employment data released last Friday was challenging, as all eyes and ears were on SVB. The employment data would ordinarily translate to an increased likelihood for a “higher for longer” interest rate narrative. But given the events of last week, the Fed may have to take a step back to reconsider the aggressive stance on rate hikes.
Market participants will eagerly await clarity this week from the Fed.
Times Like These
As you may have seen, federal regulators also took over Signature Bank of New York over the weekend. President Joe Biden said Monday morning that the SVB and Signature Bank bailouts would not be footed by taxpayers.
While the headlines may seem concerning, we have been here before. Lehman and Bear Stearns happened in 2008, and long-term investors reaped the rewards of holding through turbulent times.
Let’s remind ourselves of that and remain disciplined on our long-term journey. For some investors, dollar-cost averaging may make sense in the coming days and weeks. For others, simply remaining disciplined and sticking to the plan may be the answer.
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