Market commentary: recent market volatility

Monday, March 13, 2023

Michael Hans, CFA, Chief Investment Officer

The developments of the past week harken back memories of the Great Financial Crisis, culminating with major developments over the weekend seeking to restore stability in markets. The Federal Reserve, Treasury, and FDIC acted jointly to guarantee deposits and ensure that clients of two banks, Silicon Valley Bank and Signature Bank NY, would have full access to their money expeditiously. More importantly, the Federal Reserve is providing access to capital to the broader banking system to remove concerns that drove a mass exodus of deposits last week.

Much has been written of the unique business models of these two banks, with most attention paid to the significant concentration of clients in the venture capital community and how they invested the surge of deposits accumulated over the last several years. While we could spend hours unpacking the nuances that differentiate them from their competitors, our current focus is on the impact for markets and the economy. Fortunately, broad market exposure to these banks was limited, however, the ripple effects of their failure have meaningful implications.

Equity markets have remained fairly range bound for the last several months and relatively unchanged since the start of the year. Volatility has been far more acute within the bond market, where the recent gyrations have been akin to some of the largest market events in history. At the start of last week, testimony from Fed Chairman Jerome Powell led markets to price in the highest level of terminal rates of the cycle, anticipating that the Fed funds rates would peak at nearly 5.7%. Treasury yields moved higher across the curve, with the 2-year Treasury yield surpassing 5.0% for the first time since 2007. However, investor concerns of tighter monetary policy were quickly overshadowed by the failures and systemic risk seeping into the banking system leading rates to abruptly reverse course. For perspective, the 2-year Treasury yield now sits barely above 4.0%, with the entire term structure of the yield curve repricing lower. Markets also considerably removed expectations of rate hiking and have repriced in cuts by the Federal Reserve throughout the balance of the year. These developments have benefitted fixed income investments and after a year of pressure from rising rates, bonds are currently serving as a safe haven asset class once again.

A clear message is being sent by the markets to the Fed: your plan to hike until tackling inflation or breaking something is approaching its end and a more cautious wait and see approach should be adopted. This will allow consumers, corporations, and market participants to more accurately price risk and valuations. It will be interesting to see how the markets and the Fed interpret incoming developments and economic data as the battle with inflation and the labor market are clearly not finished. The true economic implications of the actions over the weekend will take time to play out and it is too soon to tell if financial conditions tighten significantly from here.

We are not recommending any portfolio changes and remain comfortable with our current investment positioning considering recent events. As always, we remain steadfast and committed to you throughout this market turmoil and will communicate as events unfold.

Please do not hesitate to reach out to your Citizens advisor to discuss these ongoing market events and the corresponding oversight and management of your investment portfolio.