We have taken the liberty of editing commentary form Myles Zyblock and Tony Genua to provide you with some understanding of the current financial turmoil.
The sudden and unexpected closure of SVB Financial Group (ticker: SIVB) on March 10th and the closing of Signature Bank (ticker: SBNY) on March 12th, sent shockwaves through the financial markets.
To stem the affects of these closures, the Federal Reserve, Treasury Department, and Federal Deposit Insurance Corporation (FDIC) announced forceful action to lower the risk of financial contagion:
1. Treasury instructed the FDIC to make whole all deposits of both banks, not just those accounts under the $250,000 threshold. A special assessment will be levied on the banking industry to support the uninsured depositors. Account holders will have access to their funds on the morning of March 13.
2. The Federal Reserve has introduced a generous new emergency lending facility which will make loans of up to a year to depository institutions. The steps announced over the weekend by the U.S. policy authorities are in clear recognition of the systemic risks posed by the recent bank failures. It might take a few days to really understand if these steps have helped ringfence the problem. If the measures do calm nerves, how will the recent tensions shape monetary policymakers’ views about the inflation problem?
Myles Zyblock BA (Hons.), MA, CFA Chief Investment Strategist, 1832 Investments
OUR TAKE – NOT DÉJÀ VU, NOT AN EARTHQUAKE
The weekend actions of regulators in backstopping depositors have reduced the prospects of systemic risk to the banking system. However, once tremors start, they tend to persist for awhile.
We would also say that we have had this concern on the impact of higher interest rates for quite some time now, which is why we have avoided high valuation stocks and unprofitable companies and expressed caution despite the early-year rally in technology stocks (recall our January note “Is It Time to Buy Tech?”). The lagged impact of the Fed’s rate hiking policy is clearly on its way – and perhaps the failure of SVB is an example of that. However, market leadership is constantly changing – and the recent action in Financials is another example, with the companies that have benefitted from higher rates on cash sweep accounts over the past 18-24 months now encountering a decline in deposits.
As always, we remain on high alert to repositioning the portfolio according to the changing economic landscape, including policy responses. Our approach is certainly, being tested during times like this, with high volatility and fast moving day-to-day changes including on the weekends. So far, our cautious but prudent approach has allowed the portfolios to continue to hold up well in an uncertain environment, just as they did during the COVID pandemic and throughout the bear market in 2022.
Tony Genua, Senior VP & Portfolio Manager, AGF Investments Inc.
OUR THOUGHTS
This is a disappointing, but not completely surprising impact of rising interest rates, particularly in the US. Your portfolio is divided by asset class and other factors such as geography, manager style etc. This time, fixed income (bonds) did their job and cushioned the impact of the equity fall. We know that this market volatility is not at an end, but this development may cause the central bank to slow or end interest rate increases earlier than expected.
