Monthly Market Recap: March 2023

March was a rollercoaster month for markets. The collapse of several banks, including Silicon Valley Bank, Signature Bank, and Silvergate Bank, rattled markets. This volatile period culminated in the acquisition of Credit Suisse by UBS after some unfortunate comments by the bank’s largest investor sent deposits and clients fleeing. All this news happened against a backdrop of elevated inflation and uncertainty around the Fed’s rate path.

However, after the dust settled, and investors sorted through these events, stock markets rallied for a positive month as we wrapped up the first quarter of a volatile 2023. While concerns about bank health seem to have subsided, the events offer important lessons about the complexity of the economy and investor behavior.

What SIVB taught us about market interrelationships.

Investors were watching for signs of economic stress as the Fed continued to raise interest rates to curb inflation. While investors were focused on interest rates, earnings, unemployment and consumer spending,the impact of rising rates on bank balance sheets went largely unnoticed.

Silicon Valley Bank owned many long-term bonds with low interest rates, which were highly sensitive to these rate increases. As rates rose, the price of those bonds declined sharply, causing losses.

This wouldn’t have been a problem if the bank didn’t have to sell these bonds and realize losses, but it did. The bank hada very niche clientele – mostly Venture Capital-backed companies and executives.These clients needed to pull from deposits because funding for these types of companies has been scarce in the current market environment.

To summarize, a “risk-off” shift in investor sentiment caused decreased funding to the venture capital space. In parallel, higher rates drove bond prices to decline. Needing capital, VC-backed companies pulled from their bank accounts. Silicon Valley Bank, which had a large percentage of VC-backed companies as clients, needed to sell bonds at a loss to cover these withdrawals. These factors combined to cause the largest bank collapse since Washington Mutual failed in 2008.

This serves as a reminder of the law of unintended consequences and the existence of other blind spots in the economy that we may not account for. The global economy is a complex system, making it difficult to understand the relationship between assets and players in this system. In hindsight, we could say that we should have seen this coming, but of course, nobody did. Just like the Global Financial Crisis of 2008, Tech Bubble of 2000-2001 or the numerous other panics and near-panics in history, things weren’t so obvious as we may think looking back.

What Credit Suisse taught us about investor behavior.

Credit Suisse was another casualty of the fallout from the March bank failures. The institution, marred by several costly mistakes and controversies over the last several years, finally succumbed to market pressures and was sold to rival UBS for a fraction of its value. Although the decline of CS was more gradual than that of Silicon Valley Bank, its collapse was still abrupt and shocking to markets.  

The final blow was a poor interview response from Saudi National Bank Chairman Ammar Al Kudiary, who answered “absolutely not” when asked if the Saudis were open to taking a larger stake in Credit Suisse.[1] This response drove Credit Suisse clients and investors into a panic, pulling assets and further harming the bank’s health. Eventually, UBS stepped up to acquire Credit Suisse in a deal that left few of the remaining shareholders satisfied.

With investor emotions running high after Silicon Valley, all it took was a simple comment by a large investor to send shares of Credit Suisse sharply lower and force the bank into a sale, erasing billions of dollars of shareholder value.

What do these events teach us? Firstly, it’s impossible to know the future and all the hidden risks that could cause market volatility. Why? Well, simply because we’ve failed to do this time and time again and markets are complicated. Secondly, we’re skittish, sensitive, and often driven by fear in our decisions.

So, we can’t predict bad things and, when bad things happen, we do a poor job dealing with them. That’s why having a plan is so important! We’re more likely to achieve our goals, financial or otherwise, if we can stick to a plan. Plans help us make intelligent decisions while others aren’t. As 2023 continues to roll on and markets inevitably run into rough patches, remember to stick to your plan and avoid the emotional highs and lows that can come with investing.  

[1] El-Din, Yousef Gamal, andMarion Halftermeyer. “Credit Suisse Top Shareholder Saudi National Bank RulesOut More Assistance.” Bloomberg.com. Bloomberg, March 15, 2023.https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-top-shareholder-rules-out-more-assistance-to-bank-lf9gfhbr#xj4y7vzkg.

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