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Market updates

May 5, 2023

First Republic, Fed Rate Increase

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What's happened recently?

On Monday morning of this week, First Republic was seized by the FDIC and then promptly sold to JP Morgan. In the wake of that transaction, the regional banking index has traded down substantially as the market continues to wonder what will happen next. On Wednesday, another regional bank, PacWest Bancorp, entered the market’s crosshairs as it was reportedly exploring strategic options, including a potential sale. That same day the Fed announced another interest rate hike, as markets expected.

We are available to guide you through your specific needs or to discuss any relationship or exposure to regional banks.  

Here are a few things standing out in the news:

Why is this important?

Stress on the regional banking sector continues to be a drag on public equity performance. Noticeably, big tech sales and earnings have been strong as cost cutting initiatives have been well received by the market. 

  • The regional banking sector is still operating with a high degree of uncertainty. If things get worse at any given bank, will the government or larger financial institution step in? Will they do so earlier or at the seemingly last moment?
  • As expected, the Fed increased the Fed Funds Rate by 25 basis points and hinted at the possibility of pausing its interest rate hike program given softening inflation and substantial credit tightening brought on by the regional bank issues.

What's our take?

The only thing anyone can be sure of in this market is the likelihood of continued uncertainty. We don’t try to predict the future, but instead build portfolios resilient enough to handle a wide range of scenarios. 

  • We view First Republic’s acquisition by J.P. Morgan positively, as it provided needed stability. However, as regional banks remain under pressure, we acknowledge that the market needs more assurances from government and industry leaders. The longer the uncertainty persists, the more likely credit conditions tighten providing a headwind to the overall economy.
  • In the Fed’s press release and subsequent statements by Chair Powell, neither indicated that the market should expect a “pause” in interest rate hikes but rather took the position they are in “wait-and-see”. The most recent Fed projections suggest they don’t see the possibility of rate cuts this year, which is in stark contrast to markets pricing in rate cuts in late summer or fall (see chart below). We tend to believe the Fed, but will be keeping an eye on how this disconnect affects markets. 
Source: CME Group as of May 4, 2023

 To mitigate risks from uncertainties in the markets, we believe in having responsible cash management, evaluating your goals, and ensuring that you have properly diversified and tailored investments. 

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