Charts of the Month - March

The charts and themes from the past month that tell the current story in markets and investing.

Bank Failures

Silicon Valley Bank (SVB) was likely the fastest bank failure—from rumor to demise—in American history.

It’s not uncommon for banks to fail as a few failures seem to happen every year. However, it is uncommon for banks of SVB’s size—$175 billion in deposits—to fail, which is what made this situation unique.

There were certainly aspects of SVB’s business, particularly concentration in technology industry bank clients, that made them vulnerable to a bank run.

On Bloomberg’s Odd Lots Podcast, bank analyst Dan Davies made the interesting point:

“SVB’s risk department didn’t realize the extent to which their customers were not separate entities in terms of financial decision making. The mistake was thinking that even within tech they were diversified. They thought they had thousands of customers with millions in deposits, but they actually had a few customers (mostly venture capitalists that ran in the same social circles) with billions who all coordinated leaving together, causing the run.”

The asset-liability mismatch in their bond portfolio and poor risk management were bad, but the false sense of diversification and herd nature of venture capital ultimately played a major role in their fate.

Nothing Like 2008 … at Least Not Yet

A banking crisis immediately awakens memories of 2008 for many of us.

Jamie Dimon, a prominent figure during the GFC, had this to say on the SVB failure in his recent shareholder letter:

“Most of the risks were hiding in plain sight. This wasn’t the finest hour for many players.”

The “fear index,” or VIX, has mostly ignored this crisis, indicating this may be an issue specific to a few banks rather than the entire system. The VIX is currently hanging around its long-term average, and well below recent peaks observed over the past year. 

While financials are the worst performing sector year-to-date, down 6%, it’s hardly the demise some might expect given the news cycle. Other sectors like technology, communications, and consumer discretionary have felt no impact – at least when it comes to share prices – and are all up more than double digits for the year.

The Final Hike?

The Fed hiked rates by another 25 basis points in March, the 9th rate hike in the past 12 months. That brought the Fed Funds Rate up to a new range of 4.75-5.00%, a level we haven’t seen since September 2007.

However, among investors, more emphasis is placed on what the Fed says about the future than actions being taken in the present.

One big takeaway was the softer language the Fed used around future rate hikes. Via the Wall Street Journal’s Fed Statement Tracker, the Fed removed text signaling “ongoing increases” in the Fed Funds Rate and replaced it with “some additional policy firming may be appropriate.”

The market has taken this language as an indirect signal that March was perhaps the last Fed hike of this cycle. Fed Funds Futures are now expecting the Fed to pause rate hikes at the next FOMC meeting (May 3^rd ), followed by a rate-cutting cycle starting later this summer.

Whether or not this comes true will be dependent on several factors, including the path of inflation, follow-on effects from the banking crisis, and the general state of the U.S. economy.

Inflation Data Gives the Fed Ability to Pause

Recent inflation data helps the Fed case that there is an opportunity to slow down rate hikes. Looking across key categories of the inflation index, all of them are either below or well below their peak readings.

February’s 6.0% CPI reading was the 8^th consecutive decline in the year-over-year rate of inflation and the lowest level since September 2021. There are increasing expectations that we will see another move lower when the March data is released.

And with the March rate hike, the Fed Fund Rates (4.75% to 5%) is now above Core PCE of 4.6% (which the Fed states as their preferred measure of inflation), potentially implying the Fed’s battle with inflation is nearing its final chapter.  

Diversification Keeps You in the Game

With everything happening in the world, it’s easy to get lost in the minutiae. But from an investing standpoint, there’s an easy way to keep yourself in the game during periods of turbulence, which is being diversified.

To use a golf analogy, putting the ball in the fairway is likely the biggest predictor of success. In investing, diversification helps investors find the fairway.

Any single year of great investment performance is akin to birdieing a hole in golf; it's nice, but the 18-hole scorecard is what really matters. For many of us, birdies are hard to replicate. They only come around so often.

As can be observed below, investing follows a similar track. 2022's "birdie" was commodities, up 16% for the year. But look at how commodities performed in years prior. Among major asset classes, commodities were the worst performer in seven of the ten years prior to 2022.

If you only play for birdies, you're bound to end up with bogeys or worse on many other holes. Meanwhile, a diversified approach (measured by the balanced portfolio) provides a more consistent outcome, helping you find the proverbial fairway.