Risky asset returns.
Global stocks started the year with a bang. Prices rose 9.5% in the first few weeks before markets began retreating in early February. By quarter end, financial markets brushed aside concerns surrounding rising interest rates and the stability of the banking system to end the quarter in positive territory. When all the dust settled, global stocks as a whole rose 7.3%, with larger foreign-developed stocks outperforming, and smaller U.S. companies lagging. The lone detractor of the group was commodities, which fell 5.5% following a significant rise in the prior year.
Bank failures.Panic in the banking sector took center stage in March as the U.S. experienced its first major banking failure in over a decade. Historically, a bank run involved customers physically going to the bank and withdrawing funds. As word spread and more customers withdrew funds, banks eventually became illiquid and could no longer supply enough cash to meet withdrawals. For example, in 2008, customers withdrew $16.7 billion in deposits from Washington Mutual during a 9-day bank run that led to its collapse. This was considered a substantial amount of money in a short period of time.
With the recent collapse of Silicon Valley Bank (SVB for short), we witnessed how much faster this process is in the digital age. On March 8, an SVB press release signaled that the bank was in trouble. Panic spread on social media, and with the ability to move money quickly via wire transfers, $42 billion of customer deposits had left the firm by the following day. On Friday, March 10, SVB was placed under the receivership of the Federal Deposit Insurance Corporation.
With other banks on the brink of failure and concern spreading, on Sunday, March 12, the government stepped in. In order to protect the U.S. economy, they announced the following:
- Depositors of Silicon Valley Bank and Signature Bank would be fully protected
- Customers of both banks would have access to their money on Monday morning
- The Fed would provide additional funding to assure banks have sufficient capital to meet their depositors' needs
While the red-hot labor market has cooled off a bit in 2023, jobs remain plentiful. At the most recent reading, there were 9.9 million job openings reported. While down from 12 million a year ago, it is nearly double the 5.8 million unemployed individuals reported for March.
During the most recent labor situation report, we learned that the economy has added over 1.8 million jobs in the last six months and that the total number of employed individuals now stands at 160.8 million. This level is now two million higher than the pre-COVID peak reached in late 2019.
For much of the past 10 years, inflation has been below 2%. As COVID subsided and pent-up demand exceeded supply, prices began to increase. In a short period of time, inflation went from below 2% to above 9%. To combat rising prices, the Federal Reserve has been increasing interest rates steadily over the past 15 months. Based on recent data, it appears that the rapid rise in interest rates is indeed helping to cool inflation. In fact, when looking at year-over-year changes in the consumer price index, inflation peaked in June of 2022 at 9.1%, and while still elevated, has now fallen to 5.0%. Should this trend continue, the interest rate increases will likely cease in the months to come.
During the quarter, the Federal Reserve increased interest rates both before the bank failures—during their January meeting—and afterward—during their March meeting. Despite strong job growth, persistently high inflation, and comments from the Federal Reserve, financial markets believe interest rates will not remain quite this high for very long. We can see this when looking at interest rates across different maturities of U.S. treasury securities. Currently short-term interest rates—such as 1, 3, and 6-month—are in the 4.75% - 5.0% range, where 5, 7, 10, and even 30-year rates are much lower at roughly 3.5%. As such, at quarter end, investors holding money market securities were earning more interest than investors holding 30-year U.S. treasury bonds.
This publication contains general information that is not suitable for everyone. All material presented is compiled from sources believed to be reliable. Accuracy, however, cannot be guaranteed. Further, the information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this publication will come to pass. Past performance may not be indicative of future results. All investments contain risk and may lose value. © April 2023 JSG
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