The Markets - March 20, 2023
Unknowns and uncertainty.
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.1
“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),” opined a source cited by Nicholas Jasinski of Barron’s.1
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.2 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.3
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.4
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,5 in general, the market moves in opposition to contrarian indicators.6
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.1
Markets are likely to remain volatile this week. If you find yourself wondering how short-term market fluctuations may affect your long-term financial goals, get in touch. We’re happy to talk about any concerns.
IS MY MONEY SAFE? The run on a California bank brought the Bailey Brothers Building and Loan to mind. If you’re a fan of It’s A Wonderful Life, you probably remember the scene where George and Mary Bailey distribute their honeymoon savings to make sure the Building and Loan remains solvent.7 George explains to the townspeople:
“You're thinking of this place all wrong. As if I had the money back in a safe. The, the money's not here.
Well, your money's in Joe's house...that's right next to yours. And in the Kennedy House, and Mrs. Macklin's house, and, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.”8
While banking is not that simple or straightforward, programs are in place to protect depositors.
For example, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in qualifying accounts at FDIC-insured banks per depositor. If you have accounts at multiple FDIC-insured banks, each account may be insured up to the maximum. (In many cases, depending on how various accounts are titled, more than $250,000 may be insured at a single FDIC-insured institution.)9
Last week, the Treasury Department, the Federal Reserve, and the FDIC augmented FDIC protections by introducing the Bank Term Funding Program (BTFP). The program offers one-year loans to banks, savings associations, credit unions, and other eligible depository institutions.10
Participants in the program, “can pledge their assets such as bonds and mortgage-backed securities at par, or the value at which they were originally issued, instead of market value, giving banks a greater borrowing capacity since bond prices have fallen” reported Karishma Vanjani of Barron’s. The measure makes it possible for banks to avoid selling long-dated bonds at a loss when depositors withdraw money.11
Federal Reserve officials indicated the BTFP provides enough financial support to protect all of the deposits in the United States, reported Craig Torres and Christopher Condon of Bloomberg.12
Weekly Focus – Think About It
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”13
—Benjamin Graham, father of value investing