Highlights
- Markets were on edge during the month of March following high profile bank failures in the United States and Europe.
- Despite those concerns, the S&P and NASDAQ were both up for the month. Small- and midcap stocks fell.
- Interest rate volatility was at its highest level since the Global Financial Crisis in 2008.
- Undeterred by the concerns surrounding the stability of the banking system, several central banks around the globe hiked their target interest rates.
Economic Update
March Madness took on a very different meaning this year with the failure of two of the largest banks in the country. On Friday, March 10th, Silicon Valley Bank was closed by regulators following a run on their deposits that was sparked by concerns over losses in the bank’s securities portfolio. Over that same weekend, on Sunday, March 12th, regulators announced they had taken control of a second bank, Signature Bank. The failures were the second and third largest in U.S. history behind the failure of Washington Mutual in 2008 during the financial crisis. As other regional bank shares sold off, both regulators and the heads of major financial institutions scrambled to devise emergency measures to restore confidence in the banking system.
The shockwaves were also felt around the globe. Switzerland-based Credit Suisse Group saw its shares hit new lows as clients pulled their funds from the institution and their largest shareholder, the Saudi National Bank, announced that they would not consider infusing any additional capital into the company. Ultimately, the 167-year-old firm ended-up being taken over by its Swiss rival, UBS Group for around $3 billion.
Despite the turmoil in the banking sector, the Fed raised their target interest rate by a quarter percent. Five other central banks including the UK, Norway, Switzerland, Taiwan, and The Philippines also hiked rates.
Stocks and Bonds
Investors were initially spooked by the failure of SVB and Signature Bank. Between March 6th and the low on March 13th, the S&P 500 fell by 4.7%. However, by the end of the month the market had recovered all the lost ground and ended March with a total return of over 3%. The NASDAQ composite, which is dominated by large technology stocks and has minimal exposure to the financial sector was the dominant index for the month, rising nearly 7% and leaving it solidly in the top spot so far in 2023 with a 17% total return year-to date.
At the other end of the spectrum were mid- and small cap stocks as represented by the S&P 400 and the Russell 2000, respectively. Both indexes have a higher concentration to financial stocks with banks making up nearly 10% of the Russell 2000 and over 7% of the S&P 400 as of the end of February. With the selloff in that sector of the market, both indices finished in the red for the month, but managed to remain positive so far this year.
Needless to say, Financials were the worst performing sector during the month of March, which should come as no surprise given the losses in regional bank stocks following the failure of Silicon Valley Bank and Signature Bank. Real Estate was also weak as concerns over the health of the commercial real estate market have continued to swirl. Technology and Communications Services were both up by 10%+ and, along with Consumer Discretionary, are up by double-digits in 2023.
Bonds performed well during the month and the four broad areas of the fixed income market that we track below are all up YTD. Interest rates saw higher volatility during the month, but the general direction was on the upside for prices, which means yields were down. The yield on the 2-year US Treasury Note peaked above 5% in early-March, falling as low as 3.77% during the month before ending back above 4%.
Time IN the Market vs. TIMING the Market
The past month has experienced a wide divergence in the markets. Large technology and growth stocks have led, while smaller companies have lagged. The three best performing sectors so far this year, Technology, Communications Services and Consumer Discretionary, were the three worst performing sectors in 2022. Energy, which was the only sector to post a positive return in 2022, has been one of the worst performing sectors this year.
Four weeks ago, it’s unlikely bank failures were on anyone’s radar screen and by the time they were it was probably already too late to react. Immediately following the news about SVB and Signature Bank it appeared as if the market may go into a free-fall again, yet by the end of the month the S&P basically ended up right back where it started. If we’ve learned anything in the past several months it’s that there are many things that will matter that we don’t currently know, but we don’t know what they are nor when they will happen. In other words, unknown unknowns, a term coined by the late Secretary of Defense Donald Rumsfeld.
A couple of take-aways are 1) markets can often behave in ways that may not seem to make sense in the context of the headlines; and 2) diversification across asset classes, markets, and sectors remains the best strategy to ensure that your emotions aren’t in the driver’s seat. Stay invested and don’t try to outsmart the market in the short-term. Time IN the market continues to be far more important than TIMING the market.
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