Market Commentary — March 13, 2023

All of 2023’s market gains were erased last week as the side effects of rapid Fed tightening are starting to ripple through the financial system. Financials led market declines as Silicon Valley Bank was seized by California regulators, the second-largest U.S. bank failure in history behind Washington Mutual and the largest since the financial crisis of 2008.

When the bank reported on Wednesday it needed to raise $2.25 billion to shore up its balance sheet to offset losses on long-term bond investments, there was a “bank run” on assets, creating the ultimate case of the bank’s Silicon Valley and VC community cutting off their own nose to spite its face.

But because this episode stems from the Fed’s actions to stem inflation with the most aggressive rate hiking campaign in four decades, there is concern that the ramifications could be far-reaching with a ticking time bomb of other banks similarly positioned with large unrealized bond losses.

It also leaves some companies with assets on deposit at SVB unable to pay their bills and make payroll. The news of who banked at SVB and the financial impact is only just coming to light, but so far public companies from Roku, Roblox, Sangamo Therapeutics, Ambarella, SunRun, and LendingClub are among those with significant assets tied up. It’s a big mess, and hopefully, aggressive action will be taken to curb disaster before the weekend is over, with a big money center bank riding to the rescue.

There was a jobs report on Friday, but that almost escaped notice. Jobs rose more than expected in February, adding 311k jobs. That was a moderation over last month, so maybe that tips the Fed back to a 25bps raise, especially given the damage it has done.

Of course, there are many ETFs with exposure to SVB as well. Here are the top 10 according to Nerd Wallet. There could also be some contagion to other ETFs such as bank loans and preferred stock ETFs which hold mostly financials.

In other ETF-related news, fund managers will have to reallocate billions of dollars this month as index providers make changes to how they categorize companies thanks to tweaks to the Global Industry Classification Standard (GICS) — including a reclassification of some tech companies as financials.

Nine of the top 10 best-performing bond funds so far in 2023 track preferred securities, but that could change after this week’s bank failures. And Goldman Sachs and Vanguard both launched muni bond products.

Hang on to your seatbelts next week, it’s going to be a bumpy ride. And oh yeah, SVB had branches around the world in the UK, Canada, China, Denmark, Germany, India, Israel, and Sweden, too.

Jane Edmondson
CEO and Co-Founder

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