Volatility Grips Wall Street

Perhaps the brightest thing that happened this week is that we changed the header from a winter scene to a spring scene.  The crocuses have bloomed and now the daffodils and magnolias are on the verge of blooming just in time for the second winter.  And if you’re wondering where I’m going with this, let’s just say the stock market is experiencing a second winter of its own.  It has been another tumultuous week, as cracks began to emerge in the financial sector.  Both the Dow Jones Industrial Average and the S&P 500 are now negative for the year, while the Nasdaq remains positive but is giving up ground quickly.

The sentiment was already dour before we learned of the collapse of Silicon Valley Bank (SVB) and its subsequent takeover by the FDIC.  If you’ve never heard of this bank you’re not alone.  Despite not having widespread name recognition, it is the country’s sixteenth-largest bank.  As has been reported, the bank kept most of its balance sheet in long-term Treasuries and mortgage-backed securities without hedging the risk from rising interest rates.  They are not alone in this regard.  As rates rose faster than anticipated last year, many smaller banks, and regional banks, show substantial paper losses on their books.

In the case of SVB, it tried to raise $2 billion in capital yesterday in a debt and equity offering but failed to find any buyers.  Word got out and large depositors decided to pull their money.  This created a run on the bank which could not come up with the necessary funds.  The stock plummeted, and in an act of desperation, the bank tried to find a suitor to acquire it.  When that failed to materialize it was clear the bank was in trouble.  The stock plummeted, trading was halted today, and the FDIC stepped in and took over.  While an unfortunate series of events, one is left wondering if Fed policy has created a systemic financial problem as an unintended consequence of raising rates too fast.  I want to point out that we do not have exposure to SVB or any regional banks and that large banks should be in a better position given stricter Fed oversight and balance sheet requirements.  However, these events are surely causing the Fed to rethink its current policy regarding interest rates against the inflationary consequences of pausing here.  The Fed is between a rock and a hard place.

In other significant news, investors were eagerly anticipating the February jobs report to see if January was an anomaly.  You’ll remember, the January jobs report showed 517,000 jobs being added unexpectedly during the month.  Today we learned that 311,000 jobs were added in February, well above the 223,000 consensus, but well below the January number.  On an ordinary day, I suspect this report would have spooked investors because it suggests the economy is stubbornly growing in the face of the Fed’s actions.  And yet, it was largely overlooked given the bank collapse I discussed above.  This coming Tuesday we’ll get another at-bat when the February Consumer Price Index (CPI) is released.  Let’s hope it doesn’t come in too hot.  And beyond that, on Wednesday, March 22nd we’ll learn whether the Fed is going to raise rates another 25bp or 50bp.  Prior to today, expectations were leaning toward a 50bp rate hike, but as of this moment, that has swung back in favor of a 25bp hike.  When the Fed says it is going to be data-driven, it means it.  We’re just left wondering which data will be more important this time around.

In closing, I turn to sports betting.  I am going to go on record and say I am not a fan.  After watching some horrendous officiating of various Bengals games over the past couple of years, I wonder what impact a multibillion-dollar industry such as sports betting has on the game.  So, it came as a surprise this week when I learned that the non-real “sport” of wrestling is going to start allowing organized betting.  World Wrestling Entertainment (WWE) has talked with state gambling regulators to legalize betting on its (scripted) matches.  By scripted, I mean that the match outcomes are predetermined.  WWE is working with Ernst & Young to secure match results in order to make the betting safe.  According to the report, wrestlers wouldn’t be clued into whether they were winning or losing until just before the match.  I’m dubious that this can’t be abused, but who am I to judge?  If people want to bet their very real hard-earned money on a fake “sport” so be it.  I, however, won’t be among them.  Now you know. 

Bruce J. Mason, MBA