In our last Market Commentary, we mentioned that it's typically not the known concerns that hit the markets, but it’s the unknowns that can have the greatest effect. I think it’s fair to say March ended up being a perfect example of that.
I doubt many analysts were worried about banks owning too many US Treasury bonds and finding liquidity a problem if depositors came running. Well Silicon Valley Bank (SVB) learned that lesson the hard way. And someone can fact-check this, but I think that may have been the first-ever “run on the bank” sparked by Tweets. After SVB came Signature Bank of NY, followed by Credit Suisse. While each bank had different reasons for its troubles, it did create broad concern in the financial markets and complicated the discussion regarding any further rate hikes from the Fed. (We still got a 0.25% rate increase from the Fed). During all that, Treasuries plummeted, and we saw yields on the 2 year drop from 5% to 3.44%, before settling back around 4%. That’s a -31% drop in yields in just a matter of days!
What’s the lesson to be learned here? For us, probably not what you’re thinking. With every crisis comes an opportunity. With every loser, there’s a winner. For every Silicon Valley Bank there’s a First Citizens Bank! That’s right: the small, quiet NC bank bought the remaining assets of SVB for a song, along with substantial safeguards from the FDIC, and instantly doubled its size. This marks the 11th time in the past decade that First Citizens used the FDIC to coordinate the purchase of a struggling bank for pennies on the dollar. We’d be remiss if we didn’t use this as a reminder that when it comes to investing, buying low (often when no one else is buying) can pay big rewards.
With all that turmoil and a banking crisis, it may seem a bit of a surprise that March ended up being a good month for the markets. In fact, growth outperformed value by nearly 5%. Big tech, software & communications were the winners. Banks, oil, retail, & REIT’s underperformed. The NASDAQ officially entered Bull Market territory, up +20% from its lows in December. (For perspective, the NASDAQ was -33% last year so it has more to climb and is still down more than -13% over the past year).
Almost every conversation in the news or with clients these days ends around recession: will we have one? Are we in one now? Let’s add some context around that topic: We’re not in a recession right now; the last GDP reading was +2.6%. Yes, the economy is showing signs of slowing, earnings are trending down for companies across the spectrum. However, post-covid companies are flush with cash & corporate balance sheets are the strongest on record. The consumer, the single biggest piece of the pie, is in the best shape in decades and, for now, still spending. Inflation is falling. Core CPI ex-shelter was 7% in September 2022; our last reading for that a few weeks ago was down to 4%. Unemployment is 3.6%. That doesn’t feel like recession to us.
That said, we will have a recession one day. Since 1948, we’ve averaged a recession every 6 years. So one is on the way, we’re just not in one yet. The Fed is still, at least for now, raising rates trying to slow the economy and increase unemployment. Higher interest rates on credit cards, car loans, & mortgages clearly have an impact, and in some ways, we’re just now starting to feel those effects. In the aftermath of the recent banking troubles, I think it’s fair to say banks are going to be tightening credit, which could add to the overall slowing. It’s often said the Fed raises rates until it breaks something. Was this the break? We’ll see.
Abraham Lincoln / Mark Twain / Dr. Suess* once said, “Better to remain silent and be thought a fool, than to open one’s mouth and remove all doubt”. That’s a fancy way of saying we’re not going to make any hard predictions here but given the data that we have today, should we actually enter a recession later this year or next, we can’t help but feel it would be mild and short lived. That’s why we don’t let the fears of a recession, let alone the timing of one, make a significant impact on our investment decisions. We always favor owning quality over hype. Profits over speculation. We won’t chase trends. We like to own companies whose products and services we’ll continue to use even in a recession. The indexes are still off their highs, but we think serious long-term investors will be rewarded for their patience. As we enter the 15th month of this bear market, maybe even sooner than they expect.
*I spent 45 minutes trying to fact-check who to attribute that quote to. There is no consensus on the internet on who precisely said it, so in lieu of the Useless Fact of the Month, I’m going with this absolutely true quote from Abe Lincoln:
As always, thank you for being a client,
Sean & John
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