Weekly Market Update

The Fed and Friday’s jobs report were supposed to dominate this week’s market headlines, but instead a black swan event in the banking sector dominated markets heading into the weekend.  Silicon Valley Bank, or SVB Financial, made headlines on Thursday morning when it disclosed intentions to raise capital via proposed equity raises as well as the liquidation of over $20B of marketable securities.  Such moves immediately raised eyebrows as investors worried about the regional bank’s ability to remain solvent and fears of possible contagion weighed on the broader financial sector.  However, while Thursday’s events were indeed concerning, exceedingly few believed they were precursors to an outright bank failure and multiple Wall Street analysts ranging from JPMorgan to Jeffries came out Thursday night to reiterate confidence in SVB Financial while the bank’s CEO asked clients to “stay calm”.  Any calm was short-lived though, as on Friday morning reports emerged of depositors aggressively withdrawing money and the stock was halted for trading by regulators before markets opened.  Ultimately, the flight of deposits, or bank run, proved to be too much and regulators stepped in and closed the bank Friday afternoon.  As a result, investors just witnessed the second-biggest bank failure in US history.

Exactly what SVB’s abrupt closure means for markets remains to be seen as investors must now try and handicap how the Fed will proceed now that their rate hikes are creating clear signs of liquidity issues.  Historically, signs of financial strain in the banking system would cause the Fed to pivot, but Friday’s jobs report for February complicated matters as it showed more payrolls were added last month than expected.  In addition, while Silicon Valley Bank was rather unique in that it catered to startups and venture capitalists, areas that have been particularly hard hit by rising rates, the speed at which the 16th largest bank in the US by assets imploded evokes memories of the financial crisis, and investors must also discern whether this event is specific to SVB or indicative of wider issues.  Ultimately, Fed tightening cycles almost always end with something “breaking” and investors will be closely watching next Tuesday’s CPI report while they try and figure out if the scale of SVB’s collapse was big enough for the Fed to reconsider additional hikes.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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