by Kevin McCreadie, MBA, CFA®, CEO, and Chief Investment Officer, AGF Investments Inc.
This doesn’t appear to be another 2008-era financial crisis, but markets will remain volatile for as long as there is uncertainty about the Fed’s next move(s) and the overall state of the economy and banking system, says AGF’s CEO and Chief Investment Officer.
How big of a problem to markets is the collapse of Silicon Valley Bank (SVB) and Signature Bank?
Investors were nervous about market conditions already, so the sudden collapse of both banks only makes them more jittery. Shares in U.S. banks have been hit the hardest by the news – especially regional ones that are similar in size to the two that failed – but the fallout hasn’t been confined to the U.S. banking sector entirely and it’s possible the situation could envelop markets even more broadly depending on how it unfolds from here.
That said, there are good reasons to believe a bigger calamity can be avoided, starting with the swift response by U.S. regulators to protect depositors – both insured and uninsured – of both SVB and Signature. While there is sure to be political backlash from the move, it was paramount to the process of restoring investor confidence that the U.S. Treasury, U.S. Federal Reserve (Fed) and U.S. Federal Deposit Insurance Corp. stepped in jointly when they did.
It’s also important that some of the regional banks now under the gun have shored up their own balance sheets in the wake of the two bank failures. In fact, by tapping sources that include the Fed and some of the country’s largest commercial banks, these smaller lenders are in much better position to weather the current storm should it escalate and lead to more bank runs from here.
In other words, this doesn’t appear to be another 2008-era financial crisis. In fact, it is a different scenario. The Great Financial Crisis was a crisis of “solvency,” whereby deposits funded assets that were impaired or worthless. This, however, is a “liquidity” crisis. Deposits that sat on bank balance sheets and purchased U.S. Treasury securities are now under water given the swift rise in rates. So, again, a very different scenario.
What is the impact of these bank collapses to monetary policy going forward?
There’s growing speculation that the Fed will stop raising rates – and even start cutting – because of SVB’s failure, which was, at least in part, the result of interest rates rising too much and too quickly in the first place.
Yet, that could be wishful thinking. While some investors would love to see an end to rate hikes as soon as later this month, the Fed has made it abundantly clear in recent weeks that it believes higher rates are necessary to bring inflation back down to its target level of 2%. And what would happen if the Fed did all of a sudden stop tightening and begin cutting rates? Given the circumstances of the past few days, that might not be such a boon for investors as much as it is a signal of something far riskier at play.
Indeed, while equity markets may press for an immediate rate cut, that would probably materialize only if the current crisis in confidence around the banking sector spreads beyond regional players to the country’s larger banks – something we view as unlikely.
Either way, markets will remain undoubtedly volatile for as long as there is uncertainty about the Fed’s next move(s) and the overall state of the economy and banking system. As such, investors need to be careful about overreacting to every shift in direction that takes place in this type of environment. When there’s this much tumult, it’s usually better to stay calm.
The views expressed in this blog are those of the authors and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of March 14, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.
References to specific securities are presented for illustrative purposes only and should not be considered as an indication of how the portfolio of any investment vehicle is or will be invested. It should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by AGF Investments
This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed herein.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
® ™ The “AGF” logo and all associated trademarks are registered trademarks or trademarks of AGF Management Limited and used under licence.
Copyright © AGF Investments Inc.
