The headlines have been roaring the past few days with news of Silicon Valley Banking going under (the largest banking failure since 2008) and now Credit Suisse being in trouble. We knew the effects of the Fed tightening the economy this fast would slowly come to fruition and take time to be felt in different sectors of the markets and economy. We’re finally starting to see initial signs of cracks.
We want to reiterate an important fact: this is not 2008/the financial crisis over again. This is not a situation where these banks have assets with opaque valuations clogging their balance sheets and consumer debt was loaded with variable rates and extremely disastrous creditworthiness. This is the pure result of the Fed tightening the economic system and certain sectors are feeling it first. Silicon Valley Bank was very specific to the tech/VC/startup industry and had less than 10% of their customers as traditional retail customers. Credit Suisse is largely a European banking institution and has been struggling financially long before the headlines that struck today. It’s not to say U.S. banks won’t have increased difficultly in the future, but currently the system appears to be in better shape than what media might make you think. The situation on hand in the banking sector is directly correlated with how fast the Fed has raised interest rates and tightened the economy to get inflation under control. So, where do we go from here?
Before the past week of news, there was thought the Fed would have to raise rates another 50 basis points. Now, the expectation of a 50-basis point increase has gone to zero, and the odds for them to keep rates the same or even possibly cut rates next week have dramatically increased. If the Fed pivots, this is typically a bullish signal for equities over the long term, not necessarily in the short term. But, it’ll mark that the Fed is pausing on their tightened economic standards and the market will enjoy that. We’re watching closely as the Fed has a tough balancing act ahead of them.
The economy and the stock market aren’t always directly correlated with one another. Most often, the next bull run in the stock market has already started before the worst of the economic conditions come in. So, for now, we’re standing firm on our defensive position in our portfolio. Since last year, we’ve been defensive by overweighting to value stocks over growth stocks along with an over allocation to high yielding short term bonds rather than more risky longer term bonds. This has provided good defense to the volatile markets we’re experiencing, and we feel will continue to do.
From my experience over the past 20 years in this business, I’ve learned that there will always be a headline to react to. We can’t control the headlines and we can’t control the global economy. However, we can control how we spend our time reacting, and even more importantly, how we spend our time and who we spend it with. This is the time to focus on things you can control and don’t give into the anxiety-ridden media outlets. Talk to us, let us know how we can help you as it relates to your overall financial plan. That’s what we’re here for.
Any opinions are those of David Adams and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this material does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.