Crisis De Jour

A couple of weeks ago we learned Silicon Valley Bank, a California lender to technology companies, startups, and venture capital companies, was insolvent and closing shop. Within days the contagion spread to Signature Bank, a New York based institution, which had a run-on deposits that ultimately led to its collapse.

In rapid response, the Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. (FDIC) stepped in and assured all individual and business deposits at Silicon Valley and Signature Bank would be safe. They also created the Bank Term Funding Program, an emergency lending program designed to provide liquidity to banks.1

While the recent bank failures have rattled investors and depositors it looks to be well contained. Between the collaboration of the larger mega banks, the current capital and liquidity requirements, and swift government action, it seems a crisis has been averted. Last week Jerome Powell, the Chairman of the Federal Reserve, commented that the US banking system is “sound and resilient.”2

Over the past 36 months investors have endured some volatility (that may be a bit of an understatement). The covid pandemic, rampant inflation not seen since the 70’s, interest rates rising at the fastest pace since the Volcker era 40 years back, the Russian invasion of Ukraine, China shutdowns and tensions, and most recently a fear of a major shakeout in the banking system.

As evidenced by the constant flow of media noise we are all aware of what has gone wrong. What can go right is a question to consider.

“Since World War II, if the market is up in January, it has continued to rise in the remaining 11 months of the year more than 85% of the time and average gain is about 11.5 %,” – Sam Stovall, Chief market strategist at CFRA 3

Starting in March of 2022, to extinguish the rising inflation problem, the Federal Reserve raised interest rates nine times, a torrid clip by historical standards. The good news is that the Fed is far closer to the end of this interest rate raising cycle and likely to pause or slow the pace moving forward.

The most recent monthly CPI report (Consumer Price index-inflation measure) has moved down from a year over year high of 9.1% in June of 2022, to the latest February reading of 6%. While this is still a far cry from the Fed’s 2% target, the decline in inflation is a major positive. In addition, according to the February Survey of Consumer Expectations (a survey of US households by the Federal Reserve Bank) the 3-year forward inflation expectation was 2.7% while the 5-year forward was 2.6%. Inflation is falling.4

A quick refresher on FDIC: The Federal Deposit Insurance Corp is an independent US government agency that protects against the loss of your deposits should an FDIC insured bank fail. It is backed by the full faith and credit of the US. The FDIC coverage limits are 250K for a single account owner and 500K for a joint account. For those with accounts exceeding the coverage limits we strongly recommend finding an additional bank or financial institution. 5

We have been assisting clients in establishing secondary accounts at Charles Schwab to take advantage of the higher rates offered through money market funds. The current annual rate of the Schwab Government Money Market Fund is 4.34% (subject to fluctuations).6 The Government money market fund is liquid and considered among the safest of all money markets as it is backed by US government securities and treasuries. We are doing this as a service for clients at no cost or fee to them.

Interest rates on cash deposits are paying levels we have not seen in well over a decade. This is excellent news for savings accounts and cash in the bank. Unfortunately, nearly all traditional banks have been notoriously slow to raise the rates they are paying on cash. Many banks are still paying less than half of one percent on deposits.

While corrections and volatility have always been a fabric of long-term investing, we remain optimistic on the markets and continue to believe lows were put in last October. Time in the market (vs timing the market) and owning stocks for the long run has proven to be a winning approach. In the portfolios we continue to maintain a diverse mix of strong companies (both size and industry group) while also searching for fundamentally sound and growing companies.

“The stock market is a device for transferring money from the impatient to the patient” – Warren Buffet7

As always, on behalf of the team at Sara-Bay, we appreciate your continued trust. Please reach out if one of these secondary accounts can be of help, or should you have any account or financial planning questions.

 

1.https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
2.https://apnews.com/video/business-federal-reserve-system-financial-services-
recessions-and-depressions-jerome-powell-8585f86f0e074871921418e3cdcadcb3
3.https://www.cnbc.com/video/2023/01/31/markets-tend-to-spike-after-a-down-year-says-cfras-sam-stovall.html
4.https://www.newyorkfed.org/microeconomics/sce#/
5.https://www.fdic.gov/
6.https://www.schwabassetmanagement.com/products/snvxx
7.https://www.forbes.com/sites/investor/2018/01/30/winning-in-the-market-with-the-patience-of-the-wright-brothers-and-warren-buffett/?sh=130c8b58633b
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