March 2023
Summary
The Federal Reserve’s quest for a soft landing hit a pocket of turbulence in March, with trouble in the banking sector clouding the outlook for interest rates and economic growth. For a few banks with concentrated high-dollar depositors and mismatched asset portfolios with unrealized losses from low-yielding legacy treasury bond exposures, the pressure of the current tightening cycle resulted in a series of negative events. Depositor runs, fueled in part by the ease and convenience of digital banking, coupled with falling collateral values, led to the failure or closure of Silvergate Bank, Signature Bank, and Silicon Valley Bank (the last being the second-largest failure in U.S. banking history). This prompted the Treasury and FDIC to enact emergency measures in an effort to contain a broader banking contagion. Despite the turmoil, major asset classes held up well for the month, with the notable exception of smaller cap equities, where banking and financial services companies experienced the most pain.
Equities
Stocks were mixed in March, with large blue-chip names holding up better than smaller companies. The small cap index was dragged lower by a 10% weight to regional banks, which were hammered by investor worries about potential for further bank runs. The possible impact on future credit availability, specifically access to credit by small and mid-sized businesses, drove most small cap names lower for the month. Meanwhile, Europe experienced its own banking drama, as UBS acquired long-troubled Credit Suisse at the behest of Swiss regulators. While the deal itself was hurried to avoid the troubles manifesting themselves across the Atlantic in the U.S., the issues at Credit Suisse were widely known, and constituted less of a shock to the system. Developed international equities were positive for the month, led by emerging markets with a return of 3%.
Fixed Income
Lower quality corporate bonds sold off as investors fretted over a potential slowdown in credit availability in the wake of stress in the banking market. Investment grade corporates and other high-quality credit weathered another rate hike from the Fed, albeit only 25 basis points, as bond investors favored safety over yield. After opening March above 4%, the 10-year U.S. treasury traded below 3.3% intra-month before settling at 3.49% to end the first quarter. Inflation momentarily stepped out of the spotlight, falling to 6% annualized, while employment remains extremely tight. The fed funds rate now sits at 4.75%, and the Fed is faced with a more delicate balancing act of steering the economy toward lower inflation and slower job growth, while remaining cognizant of systemic risks in the areas of lending and finance.
1 – Russell 1000, 2 – Russell 2000, 3 – MSCI EAFE, 4 – MSCI Emerging Markets, 5 – Bloomberg US Agg, 6 – Bloomberg US Long Gov/Credit
7 – Bloomberg US Corporate High Yield, 8 – Bloomberg Gold Subindex, 9 – Bloomberg Commodity
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