Special Market Update

We thought it would be valuable to provide an update and our views on some of the headlines that have been coming across TVs and newspapers in the past few weeks. Between recent regional bank failures and rumors of government shutdowns, it remains an unsettling time for many as we navigate continued rough seas in financial markets and the economy. It is our job as financial professionals to help clients navigate these difficult times and provide valuable, level-headed analysis of these situations.

Silicon Valley Bank Failure

Let’s start with the most recent and pressing headlines in the news, the failure of Silicon Valley Bank (SVB) on March 10th. When people hear bank failures, they immediately think back to the great financial crisis (2008) where we saw banks like Lehman Brothers and Washington Mutual go under and the ramifications that ensued. Both were very large U.S. banks with broad exposure and their failures created a cascade of issues in the financial system. This Silicon Valley Bank situation is a rather unique and isolated event in our opinion, however.

SVB is based in California and predominantly served the venture capital and tech start-up industries. In 2021, Silicon Valley Bank received over $100 billion in new cash deposits from their customers, mostly from these large tech & investment entities. Banks take these new deposits and create loans to earn interest on this cash. They can also invest deposit cash into other high-quality fixed income (bond) investments. The issue for SVB is that they purchased high-quality, yet long-term bond investments with this cash in 2021. As many personally experienced, 2022 ended up being one of the worst years on record for such long-term bond investments. The bonds will pay their investment back at maturity and are still considered high quality; however, they suffered “unrealized losses” due to the nature of bond pricing and being marked to market (as if sold today). Since new bonds issued today offer better yields, the previously issued bonds with lower yields are valued at a lower price until they mature at par (bond math covered here).

Simultaneously, these bank deposits started to leave the bank in favor of other higher yielding investments (CDs & treasury bills which we have been buying for clients in recent months for example). This caused a unique situation where bank assets: the long-term bonds that have “unrealized losses”, and the banks liabilities: customer deposits, had a potential mismatch. If the bank hadn’t been taken over by the FDIC, there was the potential these bonds would need to be sold at a loss, potentially harming those who had their cash held at the bank. There was a chance a $1 deposited at SBV was only going to be worth 0.95 cents for example. This was luckily avoided thanks to quick actions by the Federal Reserve, U.S Treasury and the FDIC to protect the depositors in the bank.

What was particularly unique in this case is the nature of SVBs customer base. When you deposit money at the bank, each account is FDIC insured up to $250,000. The large entities who were SVB customers were holding multiples more than this FDIC coverage amount which created extra unnecessary risks on their cash. Most banks cater to the mass consumer market and the majority of their customer accounts with balances are well under the $250,000 FDIC insurance threshold. This was also smaller regional bank that isn’t subject to as stringent of regulatory requirements. All of the big banks undergo rigorous annual “stress testing” (a direct response to the Great Financial Crisis) which makes sure a situation like SVB doesn’t happen at one of the large banks which would cause systemic risk to the economy.

It has been over a decade since we have had to worry about bank failures in the U.S., but this was a good example of why it is still important to be aware of things like FDIC insurance levels.

Debt Ceiling Drama

Another item that has been coming up frequently in the news media is the political standoff regarding the U.S. debt ceiling. The U.S. government has been running on an annual deficit for many years, and thus needs to borrow money by issuing new debt to pay bills. The debt ceiling as the name suggests, determines how much debt the U.S. should be allowed to issue. Since 1960, the debt limit has been updated 78 times (increased)! One aspect of a Divided Government is that these major policy decisions will likely experience bartering between the political parties, which is what we are seeing now. As has long been the case, there are arguments as to how much new debt & government spending is appropriate/responsible. There is no “right answer” either, it remains a highly contested issue amongst the top economists in the world. The back and forth that we are seeing right now in Congress has and will cause market uncertainty.

Failing to raise this debt limit would cause the government to default on its obligations and would not be a good situation. While this has never happened before, we faced a very similar situation in 2011, where Congress ultimately came to a compromise at the last minute. Both political parties know the ramifications of such a default would make all other political priorities and desires completely moot. It is indeed unfortunate something so important is used as a political football but is the very nature of politics: back & forth arguments until a compromise is made between Senate, the House, and the White House.

Expect continued headlines in the upcoming weeks as the summer deadline approaches with continued volatility. We do not believe the odds are high enough to warrant specific portfolio or lifestyle changes at this time.

Takeaways

It takes courage to be an investor and to earn positive, inflation beating returns. The stock market has not rewarded investors with 9% annual historical returns because things are always looking great, and investors are feeling comfortable. It is in these moments where having a PLAN in place, along with 3 distinct asset allocation buckets (Green/Safety, Yellow/Balanced, Red/Growth) can help insure smooth sailing during rough seas. A key part of our planning is to expect the unexpected, and to be prepared for all potential scenarios: the good, the bad, and the ugly.

It is not our job to bury our heads in the sand and paint a rosy picture for our clients. It is however the job of cable news anchors to paint a picture that has you coming back for more the next day or next hour. Fear is a far stronger motivation factor to prey upon. The same phenomenon when bad weather leads to a spike in Weather Channel viewership. It is important to stay educated on current topics, but until the end of times we will be experiencing unique and challenging environments that we must navigate with level-headedness to ensure long-term success. It is a continued effort of Mirus Planning in 2023 to provide more “Mirus Media” materials for our clients to hear our thoughts in this regard.

If you have any questions or concerns regarding your situation, don’t hesitate to reach out!

Best regards,

Kyle Temple
CFP®, CPWA®