Forcing interest rates downward began with the Federal Reserve introducing “Quantitative Easing” (QE), in November 2008, to rescue our economy from the mortgage bust… which turned into the Great Recession!
The S&P 500 fell approximately 57% from it’s peak in 2007, to it’s bottom in March 2009.
Over the weekend, most journalists/economists are suggesting what is currently happening is different. The reasons cited, the large banks in the US are highly regulated, much better capitalized and better prepared for a crisis than in 2007.
Another reason cited for the difference, this is not like the past credit bust, when consumers obtained massive credit who should have never qualified. This appears to be about interest rates moving up far too late, then far too fast. The rise in interest rates hammered the value of the bond portfolios of many banks, including SVB, Signature, and First Republic. Depositors were quick to withdraw massive deposits, which put these banks in a dire position.
SVB depositors, who were mostly all businesses, had their deposits over the 250K FDIC limit guaranteed by our government. Eleven of our large US banks poured thirty billion into First Republic, saving this bank (at least temporarily).
Over the weekend, UBS purchased Credit Suisse to save Switzerland’s banking system, and perhaps their economy. Credit Suisse, I understand, is twice the size of Lehman.
I hope that those who mismanaged their bank’s bond portfolios and risk management pay the price. They and their shareholders do not deserve any assistance from the taxpayers of the United States.
Will more banks fall? How far will the Federal Reserve, the FDIC, and the US Government go, if necessary? Let’s hope we don’t need to find out!!
Fed Between a Rock and a Hard Place!
This Tuesday, the Fed will begin debating if it will hike rates on Wednesday and if so, how much. This is a tough call, and I do not have empathy for the Fed.
Last week, two pieces of data were not front and center because of the banking issue. The Producer Price Index (PPI) decreased for the month of February, as did retail sales. These reports suggest inflation is truly moderating, for the time being.
If the Fed raises rates, it will be doing what the market is expecting, however most believe it has already over shot. Most believe the Fed needs to step back and let the last few months of rate hikes enter the blood stream of the US economy.
If the Fed pauses because of the banking issue, this could heighten concern…. meaning what does the Fed know, that we do not?
Even with all the turmoil, the US markets finished mixed last week with the Dow down a slight (.15%) and the Russell 2000 down (2.64%). The S&P 500 rose 1.43% and the Nasdaq composite increased by 4.41%.
The big news last week was the bond market.
So far this year, the 10-year US Treasury yield has fallen from 3.84% to start the year to 3.39% as of last Friday. The 2-year US Treasury yield has fallen from 4.41% to 3.84%. These are huge bond moves in a short-period of time.
Is the bond move related to a “flight” to safety because of the banking issue, or is it a flight to safety because of recessionary fears? Whatever the reason, it is a temporary relief to see bonds act like bonds. Meaning when stocks sell off, the sale proceeds predominantly go to bonds, pushing up values, and providing a balance to properly allocated portfolios.
Perhaps the journalists are incorrect, the 60/40 Portfolio is a prudent manner to invest your retirement funds!!!!