Since I wrote last, there has been considerable change in the financial markets. 2022 was a year that saw the Fed raise rates at the fastest rate in Fed history. The consequential effect on the Stock Market was considerably negative. 2022 was the worst performing year since the 2007-2008 Financial Crisis for the major averages.
Next, we started 2023 with a rally and renewed optimism but that quickly reversed at the start of March when markets saw stubborn inflation data and then realized that the Fed was not going to stop raising rates anytime soon. Hawkish testimony from the Chair of the Fed contributed also to the markets return to weakness.
Then a lesser followed story evolved regarding the demise of Silvergate Bank in LaJolla Ca. They were a lender primarily to Crypto and Digital Asset companies. In retrospect, this was the canary in the coal mine. Fast forward to last Thursday and a full-on Bank run on Silicon Valley Bank caused the FDIC to step in, shutter the bank, and promise to make all depositors whole regardless of deposit size. They established a $25 Billion Fund to help with this and any further problems in the regional banking system. Clearly a swift and significant move to halt further potential contagion.
Subsequently over the weekend Signature bank was closed and backstopped by the suddenly created $25 Billion Fund. Boiled down to its essence, this “Fund” is just a code name for another form of Quantitative Easing (money printing) forced to be created by the aggressive Fed rate hikes in combination with poor investment practices at these banks. The Fed pushed rates to the point where something broke. In this most recent financial collapse episode, it was poorly managed regional banks that did business with and the riskiest types of companies including Startups and Crypto.
So where does this leave us now. Clearly, collapses of this type typically occur when we are closing in on market cycle bottoms. It doesn’t mean we are at “the bottom”, but events of this sort lay the groundwork for the reallocation of capital which can begin a bottoming process followed by a recovery phase. This bottoming process may take time. One thing I do feel strongly about is that the Fed Rate hikes may very likely end. For the Fed to continue to raise the face of Banking defaults could make the current banking situation even worse. I suspect they don’t want to do further damage.
In the coming weeks, we will see what other surprises develop. I did notice today that some of the hardest hit banks in the stock market are experiencing significant positive bounces. Remember if you have any questions or wish to discuss your financial situation, please don’t hesitate to call. We are always here to help.