Both equity and bond markets experienced a volatile week as prices took turns falling and then rallying on headline news about the weakness of a handful of regional banks in the U.S. along with a Swiss bank. Poor management risk controls appear to be at the heart of each of the banks’ problems. The good news for investors in this scenario is that it’s not a systemic issue like the one that caused the 2008-09 downturn – rather its individual problems that are specific to each of the impacted banks.
Starting with Silicon Valley Bank the previous week, followed quickly by Signature Bank and First Republic Bank, pressure was put on the U.S. regional banking sector with share prices impacted even on large U.S. and Canadian banks. Separately, Credit Suisse Group, a large Swiss-based bank which has experienced more than a decade of risk-related concerns, also came under fire.
IPC Portfolio Services Chief Investment Officer Corrado Tiralongo notes that “as things currently stand, it seems that problems are confined to some select banks that are over-exposed to idiosyncratic risk factors. Central banks like the U.S. Federal Reserve will revert to raising rates to contain inflation and, even though the economy is likely to feel at least some lasting effects, the knock-on impact of bank issues should be relatively contained.”
While the current banking woes shouldn’t pose a systemic financial risk, the collapse or near-collapse of even just a handful of financial institutions is a reminder that the banking sector is vulnerable to sharply rising interest rates after years of operating in a low-rate environment.
Given the time lag in how higher interest rate policy translates to the economy, as higher rates can often take 12-18 months before their full impact is felt, traders are now on the lookout for further signs that may indicate that central banks are finally getting the slowdown they wanted to cool off overheated inflation — albeit in a messier, more abrupt, manner than they probably would have liked.
As markets react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.
Markets fluctuated throughout the week on headline news about weakness in the banking sector in both the U.S. and Europe.
Sticking to your long-term plan through periods of volatility is central to investment success.
Logic Over Emotion:
Perspective is key. Focus on long-term goals and timeframes. Contact us to discuss any questions and concerns you may have.
Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.
Source: Morningstar Direct. Growth of $100,000 shown. Rolling 10-year total returns from March 17, 2013 to March 16, 2023 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.