Judith Cheng is Chief Investment Officer for The Pacific Financial Group. Judith is a CFA Charterholder and has earned Chartered Alternative Investment Analyst (CAIA) and Certified in Investment Performance Measurement (CIPM) designations. She has also obtained FINRA Series 7 and Series 63 certifications.
Do Bad Things Only Come in 3’s…or more?
I wrote about the collapse of SVB and Signature Bank a couple of weeks ago. Prior to this, Silvergate Bank had collapsed a few days before. Since then, there has been a couple more cracks in the banking sector that has arose. Shortly after SVB and Signature Bank’s events the week of March 10th, First Republic Bank’s shares were most affected following SVB’s collapse. Following the U.S. regional bank contagion, Credit Suisse followed suit in Zurich March 19th, 2023. Markets have been volatile after a series of bank collapses. Perhaps there is light at the end of the tunnel as other banks come to the rescue.
Are There Similarities?
SVB: SVB mismanagement of liquidity and interest rate risk resulted loss of $1.8 billion led to a rush to withdrawals by uninsured clients above the FDIC $250,000 policy.
First Republic: SVB’s collapse caused concern among depositors and a panic withdrawal led to a similar rush of withdrawals revealing underlying liquidity problems.
Credit Suisse: Significant outflow of client deposits occurred after Saudi National Bank stated they will not be providing Credit Suisse more capital. Credit Suisse was struggling with large depository losses beginning in 2021 due to Archegos Capital Management and Greensill Capital. Outflows began in 2022 totaling $133 billion. The SVB collapse and Saudi National Bank’s comments pushed an imminent end.
- First Citizens Bank agreed to purchase SVB as of March 27th, 2023
- First Republic had received $30 billion in deposits from 11 major banks in the U.S.
- UBS purchased Credit Suisse for $3.23 billion on March 19th, 2023
The reprieve investors have is that both the Fed and private banks have shown support to backstop a bad financial crisis from happening. Since March 10th, 2023 to close of March 27th, 2023, S&P 500 has gained 1.59%, NASDAQ 100 has gained 5.48%, MSCI EAFE has lost 1.39%, Bloomberg US Aggregate has gained 2.15%. Looking at a 60/401 portfolio in the same time frame, it has gained 1.82% outpacing the S&P 500 and MSCI EAFE indices.
PFG’s Strategy PLUS Models have zero to minimal percentage allocated to the above-mentioned banks. The tactical and strategic aspect of PFG’s Strategy PLUS models can provide diversification along with active management when events occur. As an example, a financial sector ETF2 and an EAFE passive ETF2 both hold the above-mentioned banks in its holdings. Active management in PFG’s models may be a good mitigator in identifying companies with more resilient balance sheets. Moreover, studies have shown that during market turmoil country or industry diversification can at times work in certain types of market stresses.
The U.S. Fed continues its hiking cycle last week despite the banking sector turmoil and remains committed to reaching its 2% inflation target. European Central Bank has removed guidance about future policy moves. Central banks may be stuck between the fight against inflation or preventing further fractures in banks.
Congress hearings from the Fed, FDIC and Treasury officials begin on March 28, 2023 on the collapse of SVB and Signature Bank.
Ultimately, consumer sentiment towards banks may be shaken and another financial institution that Bloomberg identified there may be another potential financial firm that may feel the wrath of higher interest rates. No one has a crystal ball, but investors can look at the positive side of these events as a catalyst for the Fed to take a pause on interest rates that may fare better for investments.
1 Source: Morningstar Direct, 60/40 Portfolio as defined by 60% S&P 500 TR Index and 40% Bloomberg US Aggregate Bond Index as of 3/27/2023.
2 Source: Morningstar Direct, Financial Sector ETF as defined as XLF ETF and EAFE ETF as defined as EAFE ETF as of 3/27/2023.
- Najah Attig & Oumar Sy (2023): Diversification during Hard Times, Financial Analysts Journal, DOI: 10.1080/0015198X.2022.2160620
- WSJ: https://www.wsj.com/articles/first-republic-bank-stock-rescue-what-to-know-a22a3d
- WSJ: https://www.wsj.com/articles/why-is-credit-suisse-in-trouble-the-banking-turmoil-explained-6f8ddb5b
- CNN: https://www.cnn.com/2023/03/16/investing/credit-suisse-snb-loan-shares/index.html
- Reuters: https://www.reuters.com/markets/europe/ecb-needs-keep-raising-rates-core-inflation-is-sticky-kazimir-2023-03-17/
- Bloomberg: https://www.bloomberg.com/news/articles/2023-03-27/schwab-s-7-trillion-empire-built-on-low-rates-is-showing-cracks?sref=2RLdIJCU
- Bloomberg: https://www.bloomberg.com/news/articles/2023-03-20/four-banks-collapse-and-a-fifth-wobbles-in-11-days-of-turmoil?sref=2RLdIJCU
- Federal Reserve: https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20230201.pdf
DISCLOSURES - THE PACIFIC FINANCIAL GROUP
The information presented is the opinion of TPFG and is believed to be accurate but has not been independently verified. TPFG makes no warranties as to the accuracy of the information or any representations made or implied. Articles cited/linked to are the express opinion of the third-party author. There are no affiliations between TPFG and any third-party links. All information may be changed without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service and should not be relied on or deemed the provision of tax, legal, accounting or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.