Equity Markets Show Resilience Despite Turmoil in the Banking Sector

Through most of this year, until about two weeks ago, economic dynamics were mainly unfolding as expected. Inflation was cooling, albeit slower than many would like to see. Labor conditions remained strong, despite some high-profile layoff announcements in Tech and Financials. Growth remained solid, though with evidence of pressure mounting (mostly as expected). Consumer and business balance sheets were well-stacked to weather a mild downturn (that remains the case, in our view). And notably, the consensus view on major central banker policies was that rates were headed higher in the front half of the year — though that view has shifted considerably over recent days. Today, the events unfolding across the financial space have elevated economic uncertainty and increased risk, in our opinion. And while it is too early to say if the shocks across the banking sector will ultimately have a more pronounced effect on markets and the economy, a defensively biased and high-quality investment approach is certainly coming in handy right about now.  

A Rapid-Pace Bank Collapse Adds Pressure for Investors and the Fed

Coming into last week, many investors were on pins and needles waiting for what Federal Reserve Chair Jerome Powell might say about rates and the economy in his two-day testimony to Congress. In addition, Friday's February nonfarm payrolls report, which provided a key update on the strength of the labor market heading into this week’s inflation reports, was expected to be the week's highlight. But by market close on Friday, each seemed a distant focus for investors. On Friday, regulators seized Silicon Valley Bank (SVB) deposits after a frenzied attempt by the bank to remain solvent, unexpectedly ending the financial institution's 40-year run at serving primarily start-up companies in the technology and life-sciences space as well as venture capital customers. While customers with deposits of $250,000 and under receive protection from the Federal Deposit Insurance Corporation (FDIC), most of SVB’s customers had deposits above the FDIC threshold.

Stocks Poised to Potentially Move Through Another Adjustment Period

Stocks finished higher last week, opening the month of March on a high note. The S&P 500 Index broke a three-week losing streak, rising +1.9% and ending back above the 4,000 level. The NASDAQ Composite jumped +2.6% on the week, while the Dow Jones Industrials Average rose +1.8%. Materials (+4.0%), Communication Services (+3.3%), and Industrials (+3.3%) outperformed.

More Investors Realize the Fed Isn’t Bluffing

Stocks closed lower in a holiday-shortened week, with the S&P 500 Index ending down 2.7%. The NASDAQ Composite slid 3.3%, down for a third-straight week, while the Dow Jones Industrials Average finished lower by 3.0%. The NASDAQ saw its worst week since early December, while the Dow has given back all its January gains and is now slightly lower on the year. The broader S&P 500 finished below the 4,000 level last week, with Growth and Value each declining by 2.5% or more. Yet, despite giving back some of their January price returns this month, the S&P 500 and NASDAQ continue to hold year-to-date gains.