Steve Johnson: Is the Banking Crisis Contained?

A crisis contained. Hi everyone, this is Steve Johnson portfolio manager with Adviser Investments with your market takeaway.

Investors were shaken several weeks ago by the quick demise of Silicon Valley Bank. And of course, people equate that with a 2008-like scenario. But as we know, this is unlike 2008.

Back then, banks were saddled with bad loans caused by the disintegration of conditions in the housing market. This time around banks had a different problem.

They had too much money and too many deposits they had to invest. And they invested those deposits in US treasuries. And because the Federal Reserve raised rates so quickly over the last year, the value of those treasuries decreased. And rather than having to sell them at a loss, the Federal Reserve and the US government stepped in and created a program that allowed those banks to be able to not have to sell them at a loss, thus averting a crisis.

And as we’ve seen over the past few weeks, banks have rebounded and in fact, many of them have reacted quite well, including the larger banks such as JP Morgan and Bank of America and even some of the stronger regional banks such as M&T Bank. So with that crisis being averted for now, what should investors look at going forward?

Well, as we know, inflation still remains high, the Federal Reserve has raised rates by 25 basis points last week, and there is some belief that they may even raise rates again in May. But not so fast because what may happen is, because of this recent crisis in the banks, banks may continue to restrict lending. Standards may be a bit tighter, that may result in an economic slowdown.

And at this point, we are just starting to see the impact of the many rate hikes over the past year. So, if economic conditions continue to slow, we may also see inflation come down. That would be very good news for investors and also good news for the Fed because perhaps they don’t have to raise interest rates going forward. And in fact, many people believe and including the Fed Funds futures, which indicates whether the Fed will raise or not.

Many of those Fed Funds futures are indicating the Fed may even cut rates at the end of this year. So, what are investors to do? Well, you know all of us here at Adviser Investments, we stress the impact of long-term investing and also understanding that your portfolio meets your own personal goals and objectives. So yes, of course, we will be watching the data over the next few weeks, and we will keep you abreast of what we believe is happening in the market.

But for now, know that this is not like 2008. Each crisis is different than the last. And this is not a time to panic. It’s a time to stay rational, taking a look at your portfolio, making changes as you see fit, but also in consultation with your wealth advisor.

So for all of us here at Adviser Investments, we wish you the best, stay healthy and I know I’ll look forward to speaking with you soon. This is Steve Johnson portfolio manager with your market takeaway.