The collapse of SVB has increased uncertainty across the board
The Federal Reserve has some hard decisions to make
An inverted yield curve bears watching
Trust the process
Both stocks and bonds performed well in the first quarter, despite the setbacks caused by the collapse of Silicon Valley Bank (SVB) and Signature Bank. We are, however, still digging out of the bear market hole of 2022. And it may take a while yet to get there. For reference, the average bear market lasts about a year, but can certainly last longer. The S&P 500 entered a bear market last June, so we’re about 9 months in at this point.
Collapse of SVB
In a nutshell, my opinion on the whole SVB debacle is that SVB’s management team fouled things up by failing to adhere to commonsense risk management protocols. SVB’s business model (e.g. catering almost exclusively to technology startup companies) was also ripe for disaster when (not if) the technology industry underwent any significant stress.
SVB’s collapse (and the government’s subsequent bailout of SVB’s very-well-heeled depositor base), will almost certainly lead to reduced public trust in the banking system overall. And loss of trust is never good for any banking system. However, I do not believe SVB’s collapse is a harbinger of financial contagion (à la the Financial Crisis of 2007-09), but we could see ongoing issues as certain banks work through markdowns on loan portfolios over the next year or two.
But what about the Fed, interest rates, and inflation?
SVB’s collapse has forced the Federal Reserve to take a hard look at their plan for monetary policy. A side effect of raising interest rates, especially quickly, is that bad actors in the economy may get exposed as the easy money disappears. The Fed’s rate increases didn’t cause SVB’s collapse, but rather exposed SVB’s poor decisions for all to see.
But will the Fed continue to aggressively raise interest rates? My guess is that the Fed will moderate the pace of rate hikes or even stop altogether. However, it’s worth noting that Jamie Dimon (the CEO of JP Morgan) disagrees with me on this.
What does this mean for inflation? If the Fed slows or stops raising rates, then we likely are stuck with higher inflation for longer.
However, if Jamie Dimon is correct and the Fed stays the course of aggressive rate increases, then we could see inflation moderate in the short-term. But a high velocity of rate increases could add tremendous stress to banks or cause other parts of the economy to “break.” This might include higher unemployment, reduced GDP growth, lower corporate earnings, etc.
Yield Curve Inversion
In addition to the rate of change in interest rates, I’m also keeping an eye on the shape of the yield curve. An inverted yield curve (e.g. short-term rates are higher than long-term rates) has been a leading indicator of recessions over the past 40 years.
Does this mean a recession is imminent? Not for sure. But take a look at the chart below. It plots the differential between the 10-year and 2-year Treasury yields over time (a common measure of yield curve inversion).
It’s plain to see that the past few recessions have been preceded by yield curve inversions.
Keep in mind that the economy and the stock market are not one and the same. An economic recession does not mean that stock prices will fall. And I would never advocate attempting to time the market by selling now and trying to buy back in later. For most people (me included), market timing is a fool’s errand.
Stay Focused
When it comes to success in life and investing, one of the most important things we can do is focus on the things we can control, and ignore the things we cannot.
Nick Saban, the head football coach at the University of Alabama, and likely the greatest college football coach of all time, constantly instills in his players the notion of something he calls “the process.” This is commonly referred to the Process Thinking Mental Model. To wit:
Don’t think about winning the SEC Championship. Don’t think about the national championship. Think about what you needed to do in this drill, on this play, in this moment. That’s the process: Let’s think about what we can do today, the task at hand.
Nick Saban
So if you are a football/basketball/baseball player, it’s important to focus on what’s right in front of you:
Executing well in workouts and practices
Hydration and nutrition
Getting adequate sleep
Avoiding drugs and alcohol
As investors, we can and should apply the same ethos.
We cannot control what the markets will do and we cannot control what Congress does with tax rates or what the Federal Reserve does with interest rates or inflation.
But we can focus on the task in front of us:
Manage our emotions and behavior in bear markets
Implement good saving and spending patterns
Using prudent risk management (insurance, estate planning, etc.)
Reduce investment costs
Maintain a long-term investment perspective
Use good tax management
At the end of the day, we must trust the process. There isn’t much we can do about factors outside of our control. So we must focus on the task in front of us and do the best we can.
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Market Commentary 1Q 2023
Key Points:
Both stocks and bonds performed well in the first quarter, despite the setbacks caused by the collapse of Silicon Valley Bank (SVB) and Signature Bank. We are, however, still digging out of the bear market hole of 2022. And it may take a while yet to get there. For reference, the average bear market lasts about a year, but can certainly last longer. The S&P 500 entered a bear market last June, so we’re about 9 months in at this point.
Collapse of SVB
In a nutshell, my opinion on the whole SVB debacle is that SVB’s management team fouled things up by failing to adhere to commonsense risk management protocols. SVB’s business model (e.g. catering almost exclusively to technology startup companies) was also ripe for disaster when (not if) the technology industry underwent any significant stress.
SVB’s collapse (and the government’s subsequent bailout of SVB’s very-well-heeled depositor base), will almost certainly lead to reduced public trust in the banking system overall. And loss of trust is never good for any banking system. However, I do not believe SVB’s collapse is a harbinger of financial contagion (à la the Financial Crisis of 2007-09), but we could see ongoing issues as certain banks work through markdowns on loan portfolios over the next year or two.
But what about the Fed, interest rates, and inflation?
SVB’s collapse has forced the Federal Reserve to take a hard look at their plan for monetary policy. A side effect of raising interest rates, especially quickly, is that bad actors in the economy may get exposed as the easy money disappears. The Fed’s rate increases didn’t cause SVB’s collapse, but rather exposed SVB’s poor decisions for all to see.
But will the Fed continue to aggressively raise interest rates? My guess is that the Fed will moderate the pace of rate hikes or even stop altogether. However, it’s worth noting that Jamie Dimon (the CEO of JP Morgan) disagrees with me on this.
What does this mean for inflation? If the Fed slows or stops raising rates, then we likely are stuck with higher inflation for longer.
However, if Jamie Dimon is correct and the Fed stays the course of aggressive rate increases, then we could see inflation moderate in the short-term. But a high velocity of rate increases could add tremendous stress to banks or cause other parts of the economy to “break.” This might include higher unemployment, reduced GDP growth, lower corporate earnings, etc.
Yield Curve Inversion
In addition to the rate of change in interest rates, I’m also keeping an eye on the shape of the yield curve. An inverted yield curve (e.g. short-term rates are higher than long-term rates) has been a leading indicator of recessions over the past 40 years.
Does this mean a recession is imminent? Not for sure. But take a look at the chart below. It plots the differential between the 10-year and 2-year Treasury yields over time (a common measure of yield curve inversion).
It’s plain to see that the past few recessions have been preceded by yield curve inversions.
Keep in mind that the economy and the stock market are not one and the same. An economic recession does not mean that stock prices will fall. And I would never advocate attempting to time the market by selling now and trying to buy back in later. For most people (me included), market timing is a fool’s errand.
Stay Focused
When it comes to success in life and investing, one of the most important things we can do is focus on the things we can control, and ignore the things we cannot.
Nick Saban, the head football coach at the University of Alabama, and likely the greatest college football coach of all time, constantly instills in his players the notion of something he calls “the process.” This is commonly referred to the Process Thinking Mental Model. To wit:
So if you are a football/basketball/baseball player, it’s important to focus on what’s right in front of you:
As investors, we can and should apply the same ethos.
We cannot control what the markets will do and we cannot control what Congress does with tax rates or what the Federal Reserve does with interest rates or inflation.
But we can focus on the task in front of us:
At the end of the day, we must trust the process. There isn’t much we can do about factors outside of our control. So we must focus on the task in front of us and do the best we can.
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.