Convinced of Conviction

Following the previously quiet week, markets moved decidedly lower in a flight to safety from challenging economic, FED, and banking news. The DOW, S&P 500, and NASDAQ all retreated over 4%. The Russell 2000 fell a whopping 8.07%. When the markets experience risk-off movements, smaller companies, like those in the Russell 2000, are historically sold off more than large-cap companies. Additionally, the Russell 2000 contains a different sector mix compared to its large-cap counterparts, including a higher exposure to financials and real estate, which both saw additional pressure. Gold displayed strength relative to the selloff, up 0.7%, and Bitcoin lost more than -10%, mostly tied to the banking and contagion concerns. Bonds were the bright spot in markets last week, as the flight to safety and increased sentiment for a FED pivot drove yields lower (remember that bond yields move inverse to price, so lower yields mean higher bond prices).

The market movement really kicked off with FED Chair Jerome Powell addressing the Senate Banking Committee on Tuesday. Powell stated that, as he previously had, the FED is willing to continue tightening (interest rate increasing) at a rate that will be determined by inflation and employment data. These statements rapidly increased the odds of a 0.50% increase in borrowing rates for March, but those were quickly reversed following a higher-than-expected initial jobless claims report and slower wage growth. This week, CPI info will be released, giving the FED the last look at inflation data before the policy decision on March 22.

The FED started the week, but the failure of Silicon Valley Bank (SVB) on Friday took center stage, marking the second largest bank failure in US history (the first being Washington Mutual in 2008). SVB’s problem this week began with the announcement of a large loss in selling bond holdings due to higher interest rates. This led to the need for additional capital through a stock sale to meet regulatory requirements, but clients of the bank, primarily startups, saw this as a distress warning. What followed was a bank “run,” which was encouraged by heavy hitters in the venture capital space. A bank run is where large numbers of depositors rush to remove their capital from the bank, and because of fractal banking, not all deposits need to be held on hand at all times. Because of the bank run, SVB had more immediate liabilities than cash on hand, and regulators stepped in to protect consumers. The details of what will happen to the assets and liabilities of SVB should be known this week. Over the weekend, the pain continued as a second bank, Signature Bank in New York, was closed by regulators on Sunday to protect depositors as the third largest bank failure in US history as uncertainty in banking continued.

In the news, this past week sadly saw California hit by another “atmospheric river” dropping heavy rains and snow across the state. In the United Kingdom, a three-day junior doctor strike hit their national health system on Monday following the walkout of nurses, due to pay and “burnout.” Lastly, the war in Ukraine experienced its deadliest day, as Russia lost over a thousand soldiers Sunday in the fight over Bakhmut.

What happens next remains as unclear as ever. The Treasury and Federal Reserve might step in to prevent further bank runs, or maybe SVB is the first domino in the FED’s plan of demand compression (which would be closer to a “free market” solution). We have had challenging and uncertain markets before, though, and that’s why continuing to invest in companies that align with our values will diversify our holdings and allow us to embrace volatility. “But as for you, continue in what you have learned and have become convinced, because you know those from whom you learned it” (2 Timothy 3:14).

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