April 12, 2023
Have you ever reflected on the foundation of the financial system? What comes to mind? Banks, investors, the stock market, the bond market, or the credit markets?
They are the underpinnings, but the foundation or the bedrock of the financial system is confidence. Without confidence, we are left in a very precarious situation.
We have full confidence that when we withdraw cash from a bank account or money market fund, or for that matter, close out an account, we will have immediate access to those funds.
First bank vaults aren’t filled with cash that can be easily repatriated to depositors if, by an incredible long shot, everyone shows up one day to close their account. Our deposits are invested in high-quality bonds, Treasury bills, and loans.
What happened at Silicon Valley Bank last month was simply an old-fashioned bank run. Why? Confidence quickly evaporated.
The root cause of its demise had many regulators, investors, and Fed officials scratching their heads because nearly everyone was caught off guard.
A far cry from 2008
Unlike 2008, when major banks were saddled with bad real estate loans, SVB invested heavily in a portfolio of high-quality, longer-term Treasury bonds. From a credit standpoint, these are super-safe investments. What could go wrong?
Well, nothing if the bonds were held to maturity or if interest rates had remained stable.
Bond prices and bond yields move in the opposite direction. When yields rose, the bonds fell in value, creating a paper loss.
Its customer base of venture capital investors had been drawing down on their deposits as more traditional sources of funding were drying up.
With deposits being drawn down, SVB was forced to sell $21 billion in bonds and the bank took a nearly $2.0 billion loss. SVB’s hastily announced plan to raise capital was quickly scuttled when its stock tumbled, and depositors quickly began to withdraw cash, since a large majority of the bank’s deposits were above the FDIC limit.
Less than two days after the bank revealed its loss on the sale of Treasuries, regulators were forced to shut the bank.
Time to failure: less than 48 hours from a late March 8th announcement of its plans to raise capital and a morning shuttering on March 10th.
Moreover, Signature Bank, which was heavily into the cryptocurrency space, was closed on Sunday, March 12th.
Regulators did not have the time to line up buyers, and the FDIC moved to guarantee all bank deposits of the two failed banks.
As controversial as it was, Treasury and Fed officials fretted over the potential of massive bank runs when markets opened on Monday.
It is difficult to estimate the volatility we might have seen on Monday morning, but the plan to ring-fence the banks with deposit guarantees and a new lending facility from the Federal Reserve helped contain the crisis and prevent contagion.
The new lending program from the Fed enables banks with high-quality bonds to borrow against the full value (par value, not current value) of their bonds, using the bonds as collateral. In theory, there is no need to sell the bonds.
As the month came to a close, worries began to subside, and it was reflected in most of the major market indexes.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg US Agg Total Return
Source: Wall Street Journal, MSCI.com, Bloomberg
MTD returns: February 28, 2023 – March 31, 2023
YTD returns: December 30, 2022 – March 31, 2023
**in US dollars
The epicenter of 2008 was subprime lending. Today, the failure of some banks to properly manage the duration of their assets (loans and bonds) and liabilities (deposits), coupled with sharp rate hikes and regulatory missteps, are the primary causes of today’s problem.
Banks such as SVB piled into high-quality, long-term bonds but didn’t hedge against the possibility of a rapid rise in interest rates. Rising interest rates exposed a fatal flaw in its portfolio.
Regulators will dive into the details for a more thorough understanding of what happened, but the finger-pointing has already begun.
Nonetheless, the impact may be felt for quite some time.
The Fed was probably on track to boost the Fed funds rate by 50 basis points (bp, 1 bp =0.01%) to 5.00%- 5.25% at its March meeting.
Inflation remains stubbornly high, but the Fed wisely chose to defer to banking stability and opted for a cosmetic hike of 25 bp.
It gives the appearance that inflation remains a priority while focusing on the banking system.
It also puts the Fed in a difficult position, as it hopes to tackle two conflicting goals: fighting inflation with rate hikes, which would put added stress on banks, or concentrating on financial stability.
The crisis might do the Fed’s job for it, as tighter lending standards slow economic growth.
How much? No one knows.
Inflation hasn’t been squashed, but problems with SVB have not spread to other banks. The crisis eased as the month ended, and most of the assets of the failed banks were purchased.
In recent days, sentiment has shifted on rates, but the sentiment is ever-shifting. How the Fed reacts this year will depend on economic performance.
How Bear Markets Eat Away at Investor Patience
Investors rang in the 2021-2022 New Year on a high note, with the S&P 500 index almost reaching 4,800. With an assist from soaring home prices, U.S. household net worth soared to levels never seen before.
Then the bear market arrived in 2022, and almost a year and a half later, the stock market is still about 15% away from eclipsing its all-time high set in December 2021. The thought of reaching a new peak may feel like a far-off possibility, and many investors may see this market weakness as lasting an unusually long time.
But history reminds us that it’s very normal.
Here’s a look at the last five major bear markets (including 2022), and the number of days it took for the stock market to go from one peak to the next:
Next Market Peak
Total # of Days
November 28, 1980
August 12, 1982
November 3, 1982
March 24, 2000
October 9, 2002
May 30, 2007
October 9, 2007
March 9, 2009
March 28, 2013
February 19, 2020
March 23, 2020
August 18, 2020
January 3, 2022
A Wealth of Common Sense2
ZACKS INVESTMENT MANAGEMENT, INC.
1 Wall Street Journal. March 31, 2023. https://www.wsj.com/articles/social-security-reserves-projected-to-run-out-earlier-than-previously-forecast-60932de5?mod=djemRTE_h
2 Wall Street Journal. April 3, 2023. https://www.wsj.com/articles/opec-members-set-to-cut-production-voluntarily-761602d1?mod=djemRTE_h
3 Wall Street Journal. March 31, 2023. https://www.wsj.com/articles/chinas-consumers-extend-economic-rebound-from-pandemic-30eae947?mod=djemRTE_h
The pandemic-driven bear market of 2020 marked the fastest round trip (181 days) to a new peak since 1950, but I think we can classify it as an outlier given the circumstances. Beyond that bear market, the shortest amount of time it took for the market to get back to a previous peak happened in 1950, when it took 436 days. Consider that since 1950, the average number of days it took the stock market to return to a peak is 1,166 – or over three years.
During these long stretches of time, investors are prone to lose patience, which can lead to several mistakes that compromise returns over time. The economist Richard Thaler – who received the Nobel Memorial Prize in Economic Sciences in 2017 – refers to one of the effects on investors as “myopic loss aversion.”
Loss aversion says that investors dislike losses about twice as much as they appreciate gains, while the myopia of checking our investments too often only serves to amplify the impact of loss aversion. Given that it usually takes years for the stock market to return to a previous peak following a bear market, investors are forced to spend a lot of time trying to contain – and hopefully avoid – myopic loss aversion.
It can be easy to lose patience during this time, which sometimes results in investors deciding to change their asset allocation, or perhaps even making sizable bets on risky stocks or asset classes – in hopes of speeding up the return to previous peaks. These decisions are almost always mistakes made at just the wrong time.
Bottom Line for Investors
Readers need to keep this in mind: the market spends the majority of the ‘peak to peak’ time climbing back up to historic levels. In other words, remember that the bear market doesn’t last an average of 1,166 days, the round trip does. And therein lies the real harm of myopic loss aversion: as investors grow frustrated at the long time it takes the market to get back to a peak, it sometimes tempting to shift strategies in what could be the early stages of a new bull market.
What happens when market risk increases?
Historically, whenever the Federal reserve raises interest rates it increases market risk. This is the reason we became more defensive in portfolios early last year, The Fed’s battle to bring inflation down by rapidly raising interest was enough to cause the failure of two U.S. regional banks, and sparked volatility across the financial system. As the Fed continues this path, we may see additional unpredictable outcomes. The probability of recession rises along with interest rates.
In risk management, we attempt to mitigate some of the risk in portfolios by shifting to a more defensive position when it appears market risk is increasing. We do this by raising cash and underweighting foreign and U.S. equity allocations by up to 20%. Then we invest that cash in overweighting defensive assets like short-term US Treasury Bills, high-yielding money market funds, options strategies, and some gold. After the Federal Reserve announced its plan to increase interest rates to fight inflation, we began shifting to more defensive positions and have enjoyed the higher interest rates of Treasury Bills along the way.
As the economy continues to adjust to the higher interest rates, markets should give us some good buying opportunities along the way.
In these times, defense can win championships.
SVWA will continue to be cautiously optimistic while managing portfolio risk.
Personal Notes @ SVWA:
Tracy and Roberta took a trip to visit family and friends in South Carolina and West Virginia. Tracy was able to spend a few days at the Porsche racing school in Birmingham, Alabama. Racing was very fun. It was also really cool to meet the newest additions to the ever-growing family. Both of Roberta’s nieces have had babies in the last few years; Roberta and Tracy were excited to finally meet them.
Scott Ponder and Erin enjoyed all the beautiful snow that fell in Tahoe this year. Snowshoeing with our dogs and skiing.
Scott Yang and his family feel fortunate that heavy rains did not damage any personal property so far. Scott went to Palm Springs to see the professional tennis tournament and got to see players practice up close and some fun matches.
Charles enjoyed a small vacation to Las Vegas with his significant other and close friends. He and his group enjoyed great food, walking around the Strip, and exploring the Meow Wolf Art Museum. Additionally, he is in his last two classes for the CFP education program after starting in the winter of 2021. He is expecting to finish his education requirement by June of this year. He will then study and sit for the CFP exam soon after. Charles is looking forward to the warmer weather with the spring and summer seasons coming.
Lisa and her fiancé are visiting outdoor wedding venues in the Bay Area. They have a hard time deciding their favorite venue. Also, she read 11 books this year, and her favorite so far is It Starts With Us by Colleen Hoover.
Mo is expanding her skills. She has signed up for Kombucha making and sewing classes at Santa Clara Adult Education.
Katelyn is working through her 2nd year at SJSU, continuing with the business marketing route. This semester, she joined the university-affiliated Marketing Association! Through this club, she's making many new connections and learning from insightful guest speakers and events. Over her spring break, she visited a close friend in Boise, Idaho, indulging in a mountain of truffle parmesan fries while exploring an awesome city.
We trust you've found this review to be educational and helpful. If you have any questions or want to discuss any matters, please feel free to call us.
As always, we are honored and humbled that you have allowed us to serve as your financial advisor.
The Silicon Valley Wealth Advisors Team
Tracy Lasecke, CFP® Scott Yang, CPA, CFP® Scott Ponder, MBA, CFP®
Monique Ruiz Lisa Ozaki, CFP® Charles Tran Katelyn Yang
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