During the global pandemic, we referenced the image of a person looking up at a wall listing all of the issues investors were facing, with the caption “Climbing the Wall of Worry.” The “sudden” collapse of three banks last week, Silicon Valley Bank, Signature Bank and Silvergate Capital, definitely added another brick in the wall! The first two banks listed above were the second and third largest bank failures in US history. This caused significant volatility in bank stocks early this week in the US and internationally (Credit Suisse, specifically). The Federal Reserve and FDIC announced all depositors would be made whole and have immediate access to their funds at the failed banks. This step was necessary to lessen any mass movement of money between banks that could further escalate the situation. In Credit Suisse’s situation, Switzerland’s central bank stepped in with $54billion of support.
There are many differences in the three banks that failed versus those that failed during the Great Financial Crisis. Back in, 2008-09 a credit crisis caused by falling home prices, overextended homeowners and a weaker capital structure of the banking industry were factors. Today is very different. The three recent failures were created by errors in management of balance sheets, historically fast interest rate increases and having a uniquely concentrated depositor base. These three banks are far from the norm in banking today. Solid balance sheets, better capital structures and a diverse deposit bases create a much stronger structure for depositors and investors at 1st Source and other banks.
The good news for investors in diversified portfolios, like those we manage for clients, is that the exposure to those three bank stocks was minimal. The volatility in bank stocks thus far is being mitigated this week by the performance in other sectors of the market like healthcare and technology stocks. The broader equity markets are down modestly this week and we are seeing the fixed income allocation in portfolios rising in price during this period of uncertainty, as we would expect them to do.
As Rob Romano, CFA, Vice President and Director of Research at 1st Source likes to share with the team, markets often take the stairs on the way up and use the elevator going down. This analogy seems especially relevant for bank stocks this past week. As you would expect, banks are likely to be more cautious in the coming months, which will likely moderate economic growth in the interim. This is how markets start to climb the wall of worry.
1st Source has worked with clients throughout the decades and have experienced a vast variety of markets including-recessions, bull and bear markets, depressions, world wars, market corrections, soaring inflation, a great financial crisis, and zero-interest rates, to name just a few. As always, we are here to provide straight talk and sound advice and while always keeping your best interest in mind for the long-term. This time is no different!
Thank you for the opportunity to serve you and your family.
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Erik Clapsaddle, CFA, CFP®
Vice President and Senior Fixed Income Portfolio Manager
Wealth Advisory Services