Last week was quite a wild ride. Jobs reports came in better or worse than expected, depending on your view. Job openings fell to 9.6 million, showing that the labor market is beginning to tighten. Inflation has come down as well although it remains a little over double the Fed’s target of 2%.
The big drop early in the week came as regional bank stocks took a beating, after regulators seized First Republic Bank and negotiated its purchase by JPMorgan Chase. The Federal Reserve raised rates as expected by another 0.25% but has dropped language that implied there would be continued rate increases.
The ongoing bank saga has led to many consumers questioning the strength of their bank, and wondering if their money is safe, and if we’re in for another crisis like 2008-09. There are some big differences between what’s going on now and what happened then. The current bank failures have been brought about by management failures at the banks.
Silicon Valley Bank, for example, had a highly focused client base that was sensitive to interest rate risk, and then invested the bulk of its assets in long term treasuries, which are highly sensitive to interest rate risk. Other banks have also seen rising rates impact their holdings, causing paper losses.
Why do rising interest rates matter? Bond prices fall when rates rise. If I bought a ten year bond for $1,000 and it pays 3% interest, I receive $30 a year for ten years, then I get my $1,000 back. But if I want to sell it five years into the term, and current interest rates are 6%, no one will give me $1,000 for my bond if they will only receive $30 each year in interest and a new bond will pay them $60. The longer the term of the bond, the more the price will vary with interest rate changes.
Rates have risen rapidly over the last two years, so the long-term bonds that some banks invested in are worth less if they needed to be sold. This means the banks had less in reserve, which triggers other concerns as depositors, investors, and regulators look at the bank’s overall finances.
In 2008-09, the crisis was a credit crisis, meaning banks had made loans that were not being repaid. As consumers defaulted on loans and housing prices plunged, banks suddenly owned real estate they needed to manage and then sell, sometimes at a loss. While overall defaults have increased slightly with rising inflation, we’re not seeing the widespread foreclosures and other issues that led to the financial crisis.
It's not a bad idea to make sure your accounts are under the FDIC limits of $250,000 per account owner. Here at CovingtonAlsina, we do have money markets available that are held in trust for clients, so no FDIC or SIPC insurance is needed.
Your action item this week is to check with young adults coming home from or leaving for school. Make sure you have a Power of Attorney and Medical Directive for them. These forms are available through the state or reach out to us for a copy.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
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The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
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