Fed Comments and Bank Failure Send Stocks Down Sharply; Bonds Rise

The Dow (-4.4%), NASDAQ (-4.7%), and S&P 500 (-4.5%) exhibited sharp losses last week.  Meanwhile, taxable and tax-free municipal bonds each gained about 1%, mostly on Friday as there was a flight to safety that caused bond values to rise and the 10-year Treasury yield to drop sharply.

While there was some economic data released last week, the markets were most impacted by Fed comments earlier in the week that they remain “hawkish”.  Those comments implied that their campaign of raising interest rates will persist, raising the ceiling of their interest rate end point, and increasing the chances of a 0.50% rate hike at their next meeting in two weeks.  These comments drew investors to sell stocks, but with surprisingly little reaction by bonds.  Then the double whammy hit on Friday with the strong jobs report helping justify the Fed’s pressure to raise interest rates, but more importantly, the failure of Silicon Valley Bank (SIVB).

The SIVB bank failure on Friday was the 2nd largest in US history (behind Washington Mutual in 2008), as SIVB was also the 16th largest bank in the US.  As expected, this sent markets spiraling downward with a swift flight to safety as investors purchased US Treasuries, driving the yield down sharply.  There was also a report over the weekend that a 2nd bank (Signature Bank in New York) also failed, marking the 3rd largest bank in history to fail.  That’s not a good 3-day stretch for banks.  I don’t claim to know all the reasons why these two banks failed, but they each had their own issues which do not appear to be a threat to the US banking system like we saw during the global recession in 2008. 

In short, I don’t think these bank failures should send a wave of fear to US citizens about the banking sector, as banks are generally very healthy.  Thus, there does not appear to be a need to hurry and withdraw your money, as FDIC insures up to $250,000 per person per bank.  On a separate note, it was actually good to see stocks and bonds react the way they “should”, as they moved in opposite directions on Friday.  In fact, it was surprising to see that bonds did not go down in the face of the Fed comments last week, which may suggest that recession fears could be drawing investors’ interest in bonds again.  This week, all eyes will be on the important Consumer Price Index (CPI) that measures the inflation from February.

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