March Market Madness

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Welcome to Thursday,

Wow, it’s been a week. Financial journalists have been typing faster than an Irish dancer’s feet, churning out article after article about Silicon Valley Bank’s collapse and the federal government’s extraordinary actions to protect depositors, not to mention new inflation data, jobs numbers, and interest rate predictions. Haven’t been able to keep up? No sweat — we’re here to recap all the drama and what it means for you and your investments.

• The DL on SVB: If you were more tuned into the Oscars than financial news this week (we can’t say that we blame you), SVB and Signature are terms that jumped the shark when the FDIC had to parachute in to protect depositors. Guess there were no George Baileys in town… We dive into the details below.
• Never-ending inflation: Consumer prices rose 6% in February compared to a year earlier, slowing down slightly but not enough to ease pressure on consumers.
• Jobs, jobs, jobs: While high-profile tech layoffs may be making headlines (like Meta’s cuts this week), the US labor market remains hot, adding 311,000 jobs in February. Although the unemployment rate ticked up to 3.6% from 3.4%, the jobless rate is still around the lowest level in more than 50 years.
• Tough decision for the Fed: The combination of a strong jobs report and persistent inflation would normally have analysts predicting another big interest rate hike after the Federal Reserve’s meeting next week, but things have changed given that rising rates played a role in SVB’s death. One thing’s for sure — next week’s Fed meeting will be a nail-biter.

Wondering what all this market madness means for your wallet? With weird recession metaphors popping up more and more, you might want to check out our ideas for recession-resilient investments and make sure you have a solid emergency fund. No matter what the Fed does next week, it’s unlikely that we’ll see interest rates drop quickly anytime soon, so it’s a good time to park your cash in a high-yield savings account (at an FDIC-insured bank, natch.)

We’ll be back next Thursday with an update on interest rates. Until then, enjoy your St. Patrick’s Day weekend, and best of luck with your March Madness bracket!

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

• FWIW’s Guide to Long-Term Investing
• Some of our favorite inflation-fighting strategies (and a few more)
• Investing in Women: A Guide to Gender-Lens Investing
• FWIW Guide to Cleantech Investing: Sectors to Watch (covering over a dozen innovative sectors to anchor your research on sustainable investing options)
• How to Practice Faith-Based Investing

News you can use

• CDs are cool again, reports the Wall Street Journal. And no, they don’t mean that 90s-era discs 💿 are experiencing a resurgence like vinyl. Investors are pouring moolah into certificates of deposit, which are seeing yields rise as high as 5.25% at some banks. Balances in CDs jumped from $36.5 billion in April 2022 to $418.4 billion in January. If you can commit to letting your cash sit for at least six months, it might be time to learn more about how to invest in CDs.
  
• SPAMtastic childcare is coming to Minnesota, with Hormel becoming the latest company to build its own childcare center for employees. The food giant isn’t alone — the Wall Street Journal reported that more companies, like Marriott and Tyson Foods, are looking to add on-site daycare to help attract and retain talent. Whether you are looking to work for or invest in a company that supports working parents, these lists from Great Place to Work, Fortune, and Parents can help you ID companies that share your values.
  
• Oil and gas companies are talking up the role they’ll play in the energy transition, but their plans to boost investments in traditional fuels are out of whack with climate science, reports Axios. Meanwhile, the industry is upbeat after the Biden administration just approved a controversial new drilling project in Alaska. Some ESG fund managers have been buying into the oil and gas stock rally, so you may want to check your fund holdings if you prefer to minimize exposure to fossil fuels.

Panic! At the deposits

Unless you’ve been living under a rock for the last week or so (share the Airbnb listing because that sounds like a digital detox, and we love a clay mask), you’ve heard about the turmoil in the American banking system. No less than the President had to appear on air and promise to fix things to calm everyone down. “Americans can rest assured that our banking system is safe; your deposits are safe,” he said.

So what’s with all this worry, and what do you need to know?

Here’s a quick recap.

On March 10, Silicon Valley Bank (SVB), a Santa Clara, California-based lender that mainly served tech startups and high-end US wineries, was forced to shut down. Two days later, Signature Bank, a New York-based lender to many crypto companies, was also shut down. These marked the second- and third-biggest bank failures in US history.

The federal government has intervened and ensured customers have access to all of their money by dipping into an emergency fund intended for such situations. The Justice Department is also investigating. As we write this, further rumblings of trouble in the European banking sector shows that this is still an ongoing story we all need to watch.

Wait a second, banks can fail?!

Banks “fail” when they can’t return a depositor’s money. It’s rare, especially for big banks, but it does happen. There have been 562 bank failures from 2001 through 2023, but 489 of those took place in the aftermath of the financial crisis, as seen in this chart.

Banks can fail for many reasons, like bad loans or fraud, but instability in the larger financial system, as there was during the 2008 housing bubble and the Great Depression, tends to cause a domino effect with many collapsing around the same time. A bank can also collapse when many people panic about the safety of their money and start rapidly withdrawing their deposits. It’s a self-fulfilling prophecy called a “bank run,” and there’s been an element of that in SVB’s downfall as well.

If a failed bank is insured by the Federal Deposit Insurance Corporation (FDIC), the agency either arranges its sale to a healthy bank or liquidates the failed bank’s assets and guarantees all depositors any lost funds up to $250,000. Thanks to the federal government stepping in, this limit has been ignored in the case of Signature and SVB to ensure the crisis is contained and bank runs don’t occur elsewhere.

What caused SVB and Signature to fail, and why now?

SVB has been called a classic case of asset/liability mismatch. Here’s why.

Flush with deposits from recent years, the bank had parked a lot of it in safe, long-term US Treasury and other types of bonds like mortgage-backed securities. When the Fed began raising interest rates, it had a couple of disastrous effects:

• Private funding for the risky tech industry dried up, and startups began withdrawing their deposited cash to survive.
• The bank had to pay higher interest on any deposits.

When more startups started asking for their money, SVB was forced to sell its bonds before they matured at a loss of nearly $2 billion. It scrambled to raise new capital and failed.

Crypto-friendly Signature’s situation is clouded in a little more mystery. After experiencing significant withdrawal requests, the bank was seized by state regulators citing “a significant crisis of confidence” in its leadership.

Are banks still safe for my money?

Most experts say yes. "The US banking system is still relatively healthy. Capital ratios, a measure of banks' ability to cover their loans, have declined over the last year but are still at adequate levels,” noted Collin Martin of the Schwab Center for Financial Research this week.

There’s also broad consensus that SVB management made some significant miscalculations that put them in a precarious position. JPMorgan’s Michael Cembalest pointed out that SVB was in a uniquely tough spot with a high reliance on “corporate/VC funding” that could move significant amounts of cash out of the bank quickly, as opposed to the stickier retail deposits. They also got caught in a situation where the assets they needed to tap to cover those withdrawals were less valuable when interest rates rose. The folks at TD Asset Management said they saw “no reason any of the largest US banks should face SVB-like liquidity issues.”

There’s additional comfort in the fact that the Federal Reserve has created a new emergency lending program for banks and other financial institutions in similar trouble.

But worries about the future remain. Going from a long period of low interest rates to rapid hikes is rattling the economy in unexpected ways. Famed investor Ray Dalio called SVB’s collapse a “canary in the coal mine” with more knock-on effects to come. BlackRock CEO Larry Fink said it’s possible the US regional banking sector could see something like the savings and loan crisis of the 80s with more seizures and shutdowns on the way.

At the bottom we’ve included some steps you can take to keep your money safe and put your mind at ease.

How does this affect the market?

Shares in SVB’s parent company and Signature Bank plunged last week before trading was halted. Bad news about one of Europe’s biggest banks on Wednesday cut short a recovery in US financial stocks as investors worried about a cascading effect and rumblings from Washington lead many to expect the US banking sector could face more regulations soon, which would also affect bank profitability and stock prices in the future. To further complicate forecasts, some experts predict we may get smaller interest rate hikes since the Fed is under pressure to take its foot off the brakes now, pushing other sectors of the market higher. Buckle up for much more volatility!

Lastly, SVB’s collapse is seen as a loss for the climate tech landscape. Per Bloomberg, the bank was friendlier to these startups than Wall Street’s big banks and “lent big to renewable energy companies, specialized in small solar projects and by its own accounting served more than 1,550 customers doing climate and sustainability work.” This has led some to claim they overlooked some of the risks associated with this sector in favor of improving their climate credentials. While it is clear that SVB catered to a wide range of companies, the lack of access to capital as a result of its collapse last weekend, particularly for smaller clean tech startups, could dampen expectations for the previously fast-growing sector. RIP SVB.

What should I do?

Here’s a list of actions you can take in the wake of all this.

• Make sure your bank deposit accounts are FDIC-insured. It’s automatic at an FDIC-insured institution, and you can use this official search tool to check if yours is. FDIC insurance covers up to $250,000 per person, per bank. It applies to checking and savings accounts, Negotiable Order of Withdrawal accounts (NOW), money market deposit accounts (MMDA), and time deposits like certificates of deposit (CDs).
• Make sure your credit union accounts are insured by the federal government. You can check here.
• Do business with more than one bank. As Nick Maggiulli of Ritholtz Wealth Management wrote, “Now is a good time to re-evaluate whether you should have a secondary banking relationship in case your primary bank gets into financial trouble.” CNBC lists some other advantages.
• Find ways to increase your coverage if you have more than $250,000 in a single account. The Wall Street Journal recommends opening both joint and individual accounts since they are insured separately, adding beneficiaries to a trust account, using other banks or credit unions, and investing in US Treasuries, which are fully backed by the federal government.
• If you’re looking for financial stocks to avoid, you might want to check who is being downgraded by analysts or targeted by short sellers (a.k.a. investors who bet a stock is going to fall). On Friday, CNBC published lists of the 15 most shorted banks by percentage of shares held short and in dollar-value terms. The report noted that Ally Financial and First Horizon made both lists. Regional banks are looking especially vulnerable since we’re already seeing money move from them to the giant banks as depositors get jittery. S3 Partners says PNC Financial Services (PNC) is the most-shorted in the regional banking sector.

Before you go -

After a week like this, we spent more time than we probably should staring at amazing nature photographs from National Geographic. They are our go-to antidote to this sometimes-overwhelming world.

** FWIW team members own shares of Marriott.

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?