The markets were down last week, as investors initially feared the Federal Reserve Bank would be raising interest rates more than expected. Employment information announced on Friday had mostly good news on the inflation front. While over 300,000 jobs were created, labor force participation has reached pre-pandemic levels, unemployment has increased slightly, and wage growth is slowing. This news has caused many analysts to hold on predictions that the Fed will raise rates by only a quarter of a percentage point later this month.
The bigger impact was that a California bank, SVB Financial, collapsed on Friday and the FDIC took control of the bank’s assets. The bank is a major lender to venture-capital firms and the start-ups they fund. The bank received a large cash influx during the pandemic and conservatively invested that cash in treasury bills and notes. The problem is that, as interest rates rise, those government securities lose value if sold before maturity. When depositors pulled cash sooner and faster than expected, the bank had to liquidate those investments at a loss.
Other banks that focus primarily on tech-heavy firms and digital assets, or crypto currency, saw their stock price drop following SVB’s collapse. While there are fears this could lead to other bank failures, two things separate SVB from the majority of banks. First, most of their clients are in an industry that is highly sensitive to interest rates. Second, the bank’s investments were highly concentrated in long-term treasuries. A more diversified client base, or a more diversified investment strategy, could have prevented this. We don’t see this as an indication that other, larger banks will begin to fail.
We are still uncertain of the timing of a recession, if we even have one. We do expect higher interest rates and continued volatility, at least through the first half of this year. To prepare yourself, continue with prudent financial measures: pay down credit card debt, build your emergency savings, contribute at least as much as the employer match to your retirement account. Be sure you’re taking the right amount of risk with your investments given how long you have until retirement.
Your action item this week is to review funding your IRA and Health Savings Accounts for 2022 if you haven’t already.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
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 CNBC, Market Pricing Swings Back to Quarter-Point Fed Rate Hike by Jeff Cox, 3/10/23