Rising Rates, SVB sold off, Market Volatility
How are we reflecting on the first quarter?
It’s fair to say that the last three months have been turbulent.
2023 started off gloomy with rising rates, the stock markets taking a hit, bonds tanking, and the technology sector continuing to face challenges. Companies responded bracing for the toughest times with layoffs becoming the standard approach and investors reacted positively, with the stock market having a strong January.
Inflation remained persistently high and the mood in the markets worsened. By March, problems in regional banks came to the forefront with Silicon Valley Bank and Credit Suisse collapsing. The Fed and the Treasury have taken significant steps to try to prevent a wider panic for now.
Looking at the rest of the year, the Fed appears close to pausing further rate increases, potentially welcome news for markets broadly.
What's happened recently?
- Silicon Valley Bank(“SVB”) sold pieces of itself to First Citizens
- The Fed raised the FFR by 25 bps
- The CFTC issued a complaint against Binance & new charges issued against SBF
Why is this important?
The banking sector and actions by the Fed have dominated headlines for the last few weeks. While the market seems to have calmed slightly, volatility is expected in the weeks and months ahead.
- SVB’s partial sale may lead to more stability in the banking system. Interestingly, it’s a really favorable deal for First Citizens, being partially financed by a $35B 5-year loan by the FDIC at a fixed 3.5% interest rate.
- Some thought the banking sector turmoil would have pushed the Fed to hit pause, but they decided to stay the course in their continued battle with inflation. We expect the Fed to continue to raise rates, albeit at a slowing pace provided data supports it.
- The rumors are concerning, and simultaneously justify the for & against crypto arguments. As of this morning, the 2023 YTD performance of BTC was +70%.
What's our take and what can you do?
The last ~15 years have seen remarkable appreciation in asset values, primarily fueled by accommodative monetary policy. The future for markets is likely to look very different.
The pain the markets have experienced are the secondary effects of rising rates after an extended period when rates were at or near zero.
Considering our long-term investment outlook, there are key investment implications:
- Today on the fixed income side, we remain cautious of interest rate movements and, therefore, continue to build portfolios shorter in duration.
- On the private investment side, we are focusing on stressed and distressed opportunities, where managers can make structured investments in resilient and/or countercyclical businesses given the current economic climate.