Gritty, Not Pretty

I rarely read the sports section of the San Francisco Chronicle but when Saint Mary’s College advanced to the second round of the March Madness Tournament, I found myself reading about the team and a saying they had adopted this season, “Gritty, not pretty”

What a fitting phrase to describe the financial markets of late. Just as we shared last month’s blog, Blossoms, a frigid blast of reality shocked the market. Silicon Valley Bank went under, followed over that same weekend by Signature Bank. I did not see that coming, a truth I have in common with the Federal Reserve.

When a bank invests in assets that decline in value as interest rates increase, it creates a known exposure-risk. Any requests for withdrawals in excess of the institution’s cash-on-hand forces the liquidation of these assets at a loss. These losses compound quickly and erode the capital required for the institution to stay solvent faster than one can say, ‘run on the bank’. As Michael Barr, the Federal Reserve’s vice chair for supervision shared in testimony before the Senate Banking Committee, “Silicon Valley Bank’s failure is a textbook case of mismanagement.”

Fortunately, it looks like the Feds, with the help of incentives including a deep discount of $16.5 Billion on SVB’s $72 billion loan portfolio, found a buyer for what’s left of SVB. Meanwhile JP Morgan CEO, Jamie Dimon, is leading the effort to restructure fallen darling, First Republic Bank. With this news, there are signs that investors are no longer indiscriminately withdrawing funds from the other regional banks. This is a positive indication that the public is gaining some confidence that these are isolated incidents, and this damage can be contained. I find myself aligned with this view.

Without question, adding a bank failure or two to the headlines for 2023 has added an unpleasant and gritty detour to what I continue to believe will be a positive but muted year of market performance. If I’m right, optimum returns will likely depend on an increased focus on individual equity performance and de-emphasizing sector balance.

Gritty, not pretty, might just be a perfect description for what is required to succeed this year. We tend to err on the side of optimism but rest assured, we are also always prepared.

Any opinions are those of Nathan Clakley and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.