With the recent failures of Silicon Valley Bank (ticker: SIVB) and Signature Bank (ticker: SBNY), as well as the sharp sell-off of many other stocks within the banking sector, investors have been left wondering if the recent banking woes are just the tip of the iceberg for another looming financial crisis. And the recent news about Credit Suisse’s financial problems has only added fuel to the fire.
It is still early to say how all this will turn out, but we offer our thoughts on where things stand currently.
Although government and central bank interventions are purportedly meant to smooth out the ride of economic and capital market ups and downs, it seems their actions/in-actions in recent years may have, in fact, created the current situation.
In response to the COVID pandemic, governments and central banks around the world embarked on an unprecedented experiment of printing and spending money, quantitative easing, and keeping interest rates artificially low for too long. This could have been justified perhaps in 2020, but certainly not into 2021. Clearly, this led to rampant risk-taking as consumers and businesses (including banks) became flush with liquidity and took risks they otherwise would not have taken. Inflation also ensued as the money supply skyrocketed nearly 30% during the pandemic.
SIVB made poor risk management decisions by investing depositor money in longer-duration Treasury securities. When depositors panicked and ran to withdraw their money, the bank was forced to sell their assets at significant losses while at the same time unable to secure capital injections to cover their outflows. The result was a perfect moral hazard storm created by the government and central bank policy.
In addition to poor risk management behavior, it appears that SIVB and SNBY were also being distracted by political activism, focusing attention on ESG, woke, and other liberal ideological causes. For example, in 2022, SVB announced plans to provide at least $5 billion in loans for sustainability efforts and was also busy supporting Pride events. Signature Bank even closed President Trump’s bank account and called for his resignation. Barney Frank, the co-author of the Dodd-Frank Act that overhauled financial regulation after the Great Financial Crisis (GFC), sat on the Board of Signature Bank. Ironically, Inspire was currently in the process of engaging the company on the issue of debanking and protecting civil liberties, and the resolution we filed at the company was slated to be voted on the proxy ballot this Spring.
Before these recent banking woes bubbled to the surface, the global economy was already entering a period of slowing growth, and the question was whether the Federal Reserve could pull off a soft landing (raising rates without triggering a recession). Now there seems to be more risk that the US economy will enter a recession as banks are more concerned with shoring up their finances than providing additional loans that are necessary for the economy to grow. While more banks may fall, as of now, the threat to the broader financial markets seems to be contained, although that could change quickly if the banking cracks spread more.
Given the turmoil in the banking system, the Federal Reserve is likely to slow down or even eliminate future interest rate increases even though inflation remains high. It could even pivot to start reducing rates later in the year if the banking situation worsens and the economy really starts to struggle. As of now, we feel that any upcoming recession is likely to be shallow as there doesn’t appear to be all of the issues present today that created the GFC. Nonetheless, all eyes will be on the Federal Reserve rate decision on March 22nd.
Markets have certainly been whipsawed by this latest banking news, but as of this writing, the S&P 500 is still in positive territory for the year. The markets will probably continue testing the lows of last year, but at this point, we do not anticipate another crisis and market sell-off like what occurred with the GFC or COVID.
Avoid panicking – Maintain a diversified portfolio, knowing that exposure to the specific banks affected is limited.
Avoid market timing – At Inspire, we believe that the most prudent approach for a long-term investor is to maintain a proper asset allocation with disciplined rebalancing. Even though it is likely that the economy will enter a recession and the markets may sell off, it is nearly impossible to time the market, and those who do, usually end up worse off in the long run.
Prepare for increased volatility – With increased uncertainty around banking, geopolitical risks, inflation, and monetary and fiscal policy, volatility (in both directions) will remain elevated in the coming weeks and months.
Use dollar cost averaging – If you have larger investments you are planning to make in the near future, consider using dollar cost averaging to help take advantage of the volatility for the long-term accumulation of assets at lower prices.
If you have any questions, do not be shy about reaching out to your investment advisor. It is critical in emotionally charged times to have professional guidance that can help bring a long-term perspective and avoid knee-jerk reactions that can have potentially damaging long-term consequences on portfolio values and your ability to reach financial goals.
Advisory services are offered through Inspire Investing, LLC, a Registered Investment Adviser with the SEC.
Tim Schwarzenberger, CFA is a Portfolio Manager with Inspire Investing and has over 20 years of industry experience. He previously served as Managing Director at Christian Brothers Investment Services (CBIS), where he was an integral member of the Investment Team responsible for implementing the firm’s strategy development, portfolio construction, and Catholic investing initiatives.
