ND&S Weekly Commentary 3.23.23 – Markets Finished Mixed Amidst Banking Stress

March 20, 2023

Equity markets finished mixed last week as markets digested yet another crisis within the global banking system.  The collapse of Silicon Valley Bank and Signature Bank on Monday sent markets lower as investors feared a contagion in global banks.  Efforts by the Federal Reserve (responsible for a good part of this mess …) and other central banks helped to shore-up banking reserves and investor confidence.

For the week, the DJIA lost 0.11% while the S&P 500 gained 1.47%.  The tech-heavy Nasdaq finished up 4.44% as lower rates and a more predictable stream of earnings emboldened investors to add to beaten down tech stocks.  For the week, the MSCI EAFE Index fell 3.11% as news of a potential failure of Credit Suisse rattled European investors.   Emerging market equities (MSCI EM) lost 0.26%.  Small company stocks, represented by the Russell 2000, lost 2.58% due to its higher concentration of regional banks. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 1.4% for the week as yields moved lower on a flight-to-safety move.  As a result, the 10 YR US Treasury closed at a yield of 3.43% (down 27bps from the previous week’s closing yield of ~3.70%). Gold was the big winner on the week as it rallied 5.69% to close at $1,973.50/oz.  Oil prices dropped $9.94 to close at $66.74/bbl as recession fears and global oversupply weighed on prices.

Economic news released last week centered mostly around the global banking system and persistent inflation.  Monday brought news about Silicon Valley Bank and Signature Bank.  On Tuesday, the BLS reported that inflation grew at an annual rate of 6.0% in February – down from 6.4% in January and in-line with expectations. Wednesday’s news centered on the potential collapse of Credit Suisse (something that has been brewing for several years …).  On Thursday, the European Central Bank hiked interest rates 50 bps (as expected) while Swiss regulators provided stabilization funds to Credit Suisse.  Friday’s news centered on a $30Bn rescue package from 11 large banks in the U.S. to help shore up smaller domestic banks. Yes, parts of the U.S. banking system are stressed, but we do not see the makings of systemic banking crisis in the U.S..  Most U.S. banks are very well capitalized and are able to manage through this interest rate hiking cycle and potential economic slowdown.

The Federal Reserve meets this Tuesday and Wednesday, and investors are anticipating a 25 basis point rate increase.  Some investment houses, like Goldman Sachs, are calling for the Fed to pause.  Whether or not the Fed hikes 25 bps or pauses, the good news is that the Fed is likely done with their tightening.

We expect continued volatility until this banking stress calms down and until we see more clarity from the Fed and the impact of their tightening.  A word of caution regarding social media – several hedge funds (and individual investors) posted false or misleading information that dozens of individual banks would collapse and go out of business last week … only to find out later that many of these hedge funds were short the banks they were mentioning.  Charles Schwab was even mentioned as a bank that was under enormous stress.  Schwab publicly reiterated their solid financial situation and, as a show of confidence, a number of Schwab executives bought stock at the open on Tuesday morning.

Stay safe and let’s hope for a calm week!

“If you don’t have time to do it right, when will you have time to do it over?” – John Wooden