Week of March 20th, 2023

Key Points for the Week

• The banking crisis continued last week, but there are some encouraging signs that the system will survive this shock.
• Credit Suisse was the latest bank to falter, but UBS bought the Swiss bank.
• The banks in trouble all had their own issues, while larger banks are still in good shape.
• April is typically a very strong month for the stock market, and sentiment is near levels usually seen at major lows.

Economic Update

Financial markets were volatile last week as investors parsed the risks around bank closures, central banks offered additional protections for depositors, and regulators took a harder look at bank balance sheets.

For much of last year, volatility was elevated, but the risks were somewhat ‘known’ (chiefly inflation and recession)…Now, the introduction of the banking crisis has created a new unknown, which could ultimately mean a sharper increase in volatility (if worse than expected) or a quick reprieve (if fears prove unfounded).

Nicholas Jasinski, Barron’s

Unknown risks create uncertainty, and you know what they say about markets and uncertainty.

Yields on Treasuries dropped sharply as investors sought opportunities they perceived to be safe, reported Lawrence C. Strauss of Barron’s. The yield on the two-year U.S. Treasury dropped from 4.6 percent to 3.8 percent, and the yield on the 30-year U.S. Treasury fell from 3.7 percent to 3.6 percent.

While Treasuries are considered to be quite safe, one lesson from recent events is that there are circumstances in which even safe-haven investments may produce a loss. For example, in general, bonds expose investors to interest-rate risk. When interest rates rise, the value of bonds falls. If a bondholder must sell a bond before it matures, the seller may realize a loss.

In stock markets, bearish sentiment was high. Almost half (48.4 percent) of participants in the AAII Survey of Investor Sentiment were bearish. That’s well above the historic average of 31.0 percent. In contrast, just about one-fifth (19.2 percent) were bullish. That’s well below the historic average, which is 37.5 percent. The Survey of Investor Sentiment is widely considered to be a contrarian indicator and, in general, the market moves in opposition to contrarian indicators.

Despite investor pessimism, the Standard & Poor’s 500 Index and Nasdaq Composite finished the week higher, while the Dow Jones Industrial Average finished slightly lower.

This Week in the Markets

On the heels of the first three bank failures in years, issues spread across the pond last week as Credit Suisse Group AG became the latest banking institution to make headlines over solvency concerns. This Swiss bank was a three-dollar stock two weeks ago and has long been a laggard, down more than 90% from its all-time high, even before the trouble started to brew. Our main question: Are Credit Suisse’s challenges really a surprise?

The three banks that went under last week are two crypto-heavy institutions and Silicon Valley Bank, which loaned money to tech and startup companies. By no means are these traditional banks, and many other larger U.S. banks are in solid financial shape. Once rates rose and tech slowed, the issues piled up for Silicon Valley Bank and the company filed for Chapter 11 bankruptcy.

To help restore confidence in banks, the Federal Reserve, FDIC, and U.S. Treasury Department pledged that all SVB depositors will be fully backstopped and other banks can obtain financing through a new Bank Term Funding Program (BTFP). The price of many small banks fell last week, but the large banks held up much better.

The Saudi National Bank said it would not buy any more shares or provide additional financial assistance to Credit Suisse. Since it is the largest shareholder, shares fell another 24%. While credit default swaps linked to Credit Suisse’s bonds hit all-time highs around the middle of the week, other European banks’ credit default spreads moved higher but not to new highs. Think of credit default swaps as the price of insurance against potential losses. A high number indicates worry is increasing about a bank’s solvency.

Swiss regulators and the Swiss National Bank offered Credit Suisse a $54 billion line of credit to help stem the initial worries. Over the weekend it was announced that UBS Group would buy Credit Suisse thanks to “substantial liquidity assistance” from the Swiss National Bank. The deal is for approximately $3 billion, with the Swiss government providing 9 billion Swiss francs to backstop potential losses.

The bottom line is the banking crisis is not over yet. Money is flowing from small banks to large banks, and large banks are in solid financial shape. Lastly, the Financial Select Sector SPDR ETF remains above the 2007 peak. As shown below, this could be one of the most important charts in the world. Should it significantly break the 30 level more trouble could be coming. As of now, it remains above this critical point.

Stocks Up Despite Banking Crisis

In the face of a major crisis, banks gained last week, with the S&P 500 up 1.5% and the tech-heavy Nasdaq up 4.4%. In fact, it was one of the largest weekly outperformances for the Nasdaq versus the Dow since the early 2000s.

A large drop in yields and lowered expectations about the Fed being ultra-aggressive drove the stocks’ bounce. At the same time, fear jumped to levels consistent with major market lows. In other words, those stockholders who wanted to sell, have sold. The American Association of Individual Investors (AAII) bulls were beneath 20% for the first time since September 2022, while bears were at the highest level they’ve been this year.

March is well-known for major market lows and volatility. March hit major lows in 2003, 2009, and 2020, amidst negative headlines and sentiment. In fact, over the past 20 years stocks have bottomed in March, as the chart below shows.

While the first half of March is often dicey, the second half of the month tends to see more green. Better times could be ahead if history is a guide.

Lastly, stocks in April during a pre-election year tend to do quite well, up 3.5% on average. But the amazing part is they’ve been higher 17 of the past 18 years, up more than 94% of the time. Yet another reason to believe a spring rally is quite possible.

2022 IRA and Roth IRA Contribution Reminder

The deadline to make 2022 contributions to your IRA or Roth IRA is April 18, 2023. The total contributions that you can make annually to these accounts cannot be more than the following:

• 2022 maximum allowable IRA and Roth IRA contribution for those 49 and under: $6,000
• 2022 catch up contributions for those 50 and older: $1,000

If you have already contributed the maximum amount allowed for 2022, the total contributions that can be made in 2023 are:

• 2023 maximum allowable IRA and Roth IRA contribution for those 49 and under: $6,500
• 2023 catch up contributions for those 50 and older: $1,000

If you are unsure of how much you have contributed to your IRA or Roth IRA for the year 2022, or would like assistance in opening one of these accounts, please contact us.

Did you Know? This Week in History

March 22, 1934: First Masters Golf Tournament Begins

On March 22, 1934, the first Masters golf championships teed off in Augusta, Georgia. The Augusta National Golf Club course presents difficulties for many of the golfers, but Emmet French, Jimmy Hines and Horton Smith finish under par and share the lead after shooting 70, two under par, in the first of four rounds.

Smith would go on to win the tournament, finishing four under par with scores of 70-72-70-72. Craig Wood (-3), Paul Runyan (-2) and Billy Burke (-2) were the only other golfers to finish under par.

Smith was a big fan of the course, telling the press: "There is nothing monotonous about that course, and it is one of the most beautiful I ever played. Each one of the holes presents something new." Smith would go onto win the 1936 Masters as well, cementing his Hall of Fame golf career.

While Smith’s performance at the Masters was impressive, much of the coverage was focused on Bobby Jones, the man who founded and helped design golf’s most famous course. Four years earlier, Jones had reached golf’s apex when he became the first to achieve a Grand Slam by winning all four major tournaments in the same year: the British Open, U.S. Open and the British and U.S. amateur championships. He won 13 major championships from 1923-30.

Despite his historic accomplishments, Jones struggled in his inaugural round at the Masters, especially on the greens. He putted 36 times, including three three-putts, on his way to a 76 (+4). Although he improved upon that first round with subsequent rounds of 74-72-72, Jones finished tied for 13th, 10 shots behind Smith.

Weekly Focus

Happiness is the absence of striving for happiness.

Zhuang Zhou, Chinese Philosopher

Comparison is the thief of joy.

Theodore Roosevelt, 26th President of the United States