The month of March was off to a strong start until a weakness in the banking sector reared its ugly head. Several regional banks were shut down, headlined by Silicon Valley Bank, bringing the S&P 500 down over 5% off its highs in less than a week’s time. Once the dust settled the market was able to get back on track recouping all of the losses sustained during the banking turmoil during the final 3 weeks of the month and ending March positive and the 1^st quarter of 2023 positive by over 7%. For the quarter, the S&P 500 was led by the mega-cap stocks with Apple up 27%, Microsoft 21%, Amazon 23%, Nvidia 90%, Tesla 68%, Meta 76%, and Google 17%. It is no surprise that the worst-performing sector in March was the financial sector posting a negative return of 9.6%. Technology as a whole continues to outperform and was the leading sector in March posting a positive return of 10.9% and was positive 21.8% during the first quarter. The 10-year treasury rate also came down during the month from a high of 4.09% on March 2^nd and ended the month at 3.55% an over 50 basis point decline in less than a month. From March 9^th through March 12^th the 2-year treasury rate dropped more than 1%, which was the largest 3-day drop in the 2-year rate in 35 years. As you would expect, a sharp drop in interest rates led to rising bond values and Bloomberg US Aggregate was up 2.54% for the month.

Hearing that there are banks struggling in the news is sure to cause some flashbacks and heartburn for investors who remember the 2007-2009 Financial Crisis. The first bank to falter in March was Silvergate Bank which ended up choosing to close and self-liquidate before being shut down by regulators. Their closure was mainly due to their heavy involvement in cryptocurrency exchanges and their ties to now-defunct crypto exchange FTX, and the losses they were forced to realize in their loan portfolio. The next bank to falter and eventually fail was Silicon Valley Bank, which was tied to the Technology startup industry found in Silicon Valley, California and a large percentage of its depositors were above the FDIC-insured amount in their accounts. Silicon Valley Bank saw a huge outflow of deposits in March which forced them to sell a large portion of their bond portfolio at a loss (similar to Silvergate) in order to shore up their deposit base. When this became public it caused even more cash outflows and $42 Billion of deposits to be withdrawn from SVB on March 9^th alone. This led to regulators shutting down the bank and the FDIC agreeing to cover all deposits even those above the $250,000 FDIC insurance limit. The third bank to close in March was Signature Bank, which like Silvergate, had heavy ties to Cryptocurrencies and like SVB, had a large percentage of depositors above the FDIC limit. Nervous depositors caused another run as they moved their funds to larger more secure banks and once again regulators came in and shut down the bank. The FDIC agreed to cover all deposits even those above the FDIC limit.

After these 3 bank closures, there were concerns that the bank runs would continue to spread. The next bank to come under scrutiny from depositors and regulators was First Republic Bank due to once again a high number of depositors with accounts above the FDIC limit. This time, before regulators had to step in, several other large banks came to the rescue to help First Republic shore up its deposit base. JPMorgan Chase, Bank of America, Wells Fargo, CitiGroup, and Truist combined to deposit $30 Billion at First Republic. The banking weakness was not limited only to U.S. banks as Credit Suisse began to feel the pressure as their stock dropped 31% in one day after their largest investor, the Saudi National Bank, said they would not take a larger ownership share to help shore up the Credit Suisse deposit base. This led to an emergency line of credit being extended from the Swiss government and the Swiss government eventually helping to negotiate the sale of Credit Suisse to UBS.

The banking crisis in March led many to believe the Federal Reserve may pause their ongoing rate hikes but after their March meeting Federal Reserve Chairman, Jerome Powell, announced they would continue with the expected 0.25% increase. The market reacted negatively at first but quickly shook off the rate hike and continued the rebound from the market bottom caused by the March banking shutdowns. There is a belief that the Fed is near its terminal rate where inflation will continue to come down without having to raise interest rates further. Whether this is actually the case remains to be seen but CPI’s year-over-year number did come down to 6.0% in February, its lowest year-over-year level since September of 2021. Even just a pause in the Fed’s rate hiking cycle could be a boon for the market as the stability of rates could put investors at ease and if inflation continues to cool that will also be an ongoing positive for equity markets.

The burning question for the economy is: “What will be the long-term impact of a year of steep rate hikes by the Federal Reserve?” Many have predicted a recession to be on the way since the Fed started hiking rates in March of 2022. In the face of these predictions, the final revision for 2022 Q4 GDP came out in March and was 2.6%. This economic growth combined with a strong labor market has many wondering if a recession is truly around the bend. The unemployment rate remains at historic lows even through layoffs in the tech sector. Hiring in Leisure and Hospitality continues to be robust as a total of 311,000 new jobs were added to the economy in February. Even as Disney and other large companies announcing layoffs made headlines, we have not really seen the overall employment numbers waver.

As stated in our last newsletter, at some point the Fed tightening will break something in the economy. March left many wondering if the banking crisis of March was the thing that rate hikes broke. And will this alter the course of future Fed rate hikes? And will the labor market start to show any signs of weakness in the coming months?

One lesson to be learned from March may be that short term market news should not always force you to alter your long-term strategy. If you were to have sold out of the market the day you heard that Silicon Valley Bank was being shut down, you would have missed out on the rebound. The S&P 500 was positive 6.22% over the 2 ½ weeks since that day. Again, the key to long-term investing success is to build a portfolio that takes the appropriate amount of risk for you and allows you to stay invested through many different market scenarios.

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