With so many recent headlines talking about the current stress on financial markets, we wanted to give you insight to what exactly happened and as an investor, what it means for your portfolio.
It all started here…
Silicon Valley Bank and Signature Bank saw a meltdown starting at the end of the week of March 6, 2023. With an overwhelming amount of their clients rushing to get their funds out of the bank, and without having sufficient deposits available for their clients, the banks were ultimately shut down and the FDIC and Treasury stepped in to prevent any further spread of distress to other parts of the financial system. Both banks were exposed to high risk due to the clientele they served. Silicon Valley Bank was a preferred bank of small tech startup companies and technology venture capitalist groups. The underlying businesses were inherently risky. With small tech companies seeing large layoffs and excess need for cash after the pandemic, the need for available cash rose and Silicon Valley, poorly managing their bank assets, were forced to create cash which resulted in taking devastating losses and leading to their downfall. Signature Bank had large exposure to a variety of Cryptocurrency ventures which also saw massive levels of stress from the pandemic. Both banks illustrated the need for proper risk management in a time of historical rate hikes that still prove as a pain point for the economy today.
How can this happen?
The Dodd-Frank Act was passed by the U.S. congress in 2010 following the Great Financial Crisis. This act required large financial institutions to have increased regulations and stricter lending policies to prevent such a situation from happening again. A large part of the Dodd-Frank Act was the requirement for banks to undergo stress tests to ensure that depositor’s money is safe in the event another financial crisis were to occur. In 2018, a repeal of a portion of the act was rolled back that eliminated the stress test for banks with less than $250 billion in assets. This means that smaller banks no longer had to go through the stress tests that larger U.S. banking institutions must adhere to. The rollback of some of these bank regulations, along with glaring mismanagement, created the issue that we are now seeing unfold in these recent weeks.
So, what does this mean for you?
As the dust settles, there are still rumors of other banks having similar issues with liquidity. With that being said, the FDIC, U.S. Treasury, and Congress have made it clear that they do not want these current issues to create a contagion effect throughout the rest of the banking system. These types of scenarios are why we have remained in a more defensive stance in portfolios starting at the beginning of this year. The effect of the historical rate increases we saw from the Federal Reserve in 2022 are still unfolding and we may not see the result until later in 2024. This is another reason to stay diversified to mitigate as much unnecessary risk as possible in times of market contraction and expansion. We will be watching the Federal Reserve’s comments in their next meeting starting on Tuesday, March 21st. This meeting may give us a glimpse at what to expect going forward this year with the understanding that financial conditions can change in the blink of an eye as we have just witnessed this past week.
If you have any questions about this article or about your portfolio, please do not hesitate to reach out to us.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.