Happy St. Patrick’s Day!

Given the news headlines surrounding Silicon Valley Bank and the banking industry in general, we wanted to provide you with a market update. This should arm you with the right information and to let you know our stance regarding your financial progress.  Ultimately, we’re well positioned and don’t recommend any action at this time, although we are on top of things and are moving parts of our portfolios into 6 month US treasuries for even more stability during this period of uncertainty. The recent news has been quite complex, so we’ll do our best to update you on recent developments in clear terms without the jargon. 

First, how did the bank collapse? 

Silicon Valley Bank was doing well in the tech boom. It enjoyed a huge increase in deposits following Covid as the tech sector boomed, mostly from large venture capital businesses, with the money held on deposit with SVB tripling between 2019 and 2021. The bank had to put this money to work.
The size of the deposits became sizeable, so they invested a large portion in long-term bonds earning approximately 1.56% with an average maturity date of over 10 years. This saw positive gains for a while, as the 1.56% rate was above the deposit rates, but it quickly unfolded.

The Federal Reserve increased interest rates, with the amount SVB were paying to deposit holders growing to 4.50% per annum for start-ups. This was considerably beyond the 1.56% they were receiving on the bonds. The assets they held in bonds also fell in value, because when interest rates rise, bond values fall creating a double hit. 

In response, SVB tried to prop up their balance sheet by selling assets. People became skittish and quickly withdrew their money, creating a classic bank run. SVB was left with no liquidity and major losses, forcing them to default. 

We’ll try to cover the major issues you should probably care about below:

1) Could this spread to other banks?  For the majority of investors, this is the biggest question. We’d argue that while the rapid rise in interest rates has caused some short-term losses for the banking industry that are meaningful, industry capital levels are better positioned to weather the storm. We also believe the regulatory response from the Federal Reserve, the FDIC and the US Department of the Treasury has been quick, unified, and substantive. In the short term, we’d not be surprised to see market volatility remain elevated, reflecting the increased uncertainty around potential outcomes, but most banks have much more diversified sources of funding, and lend to a much wider range of industries. 

2) Is it isolated to technology and crypto-related businesses?  Not necessarily, but this industry is significantly more exposed, as many companies operate with negative cashflows that require ongoing funding. If the funding dries up, this can cause severe stress.

3) Will taxpayer funded bailouts occur?  The short answer is that we don’t know. Liquidity support is being offered to protect the banks customer base, but this has been part of the role of central bank authorities for many years and one with which they are familiar. 

4) What portfolio actions make sense right now?  At the core, we hold a wide range of assets that are globally diversified by sector, industry, and designed to navigate broad risk factors. As a fiduciary retirement planning firm that primarily serves those 55-75 of age, this type of setup is one that will present opportunities. It is worth remembering that we want a margin of safety for any risk taken. It is normal for someone in their late 50’s, 60’s and 70’s to fully protect 30% to 60% of the portfolio and life’s savings from major market volatility and loss. With rates having risen 8 times in the last 15 months, there is an opportunity in yield right now, not so much stock growth. If one can pick up 3% to 6% with guarantees and safety, why take on any extra risk in the stock market specifically? Because of the ability to make more than normal on safe instruments with principal protection, we don’t believe this bodes well for the stock market in the near term. 

Our three biggest responsibilities:

In situations like this, we have three responsibilities. The first is to support you in helping you understand what matters and what doesn’t. The second is to ensure we are monitoring risks and investing in line with your risk tolerance. And third, we want to find opportunities to reach your goals faster, come what may. Our actions are always oriented toward your retirement plan and making decisions consistently over time. Please don’t hesitate to contact us with any questions about your financial situation. We’d be delighted to help. 

If you are a client and have not had a review in a while, reply to this email or call our office at (571) 577-9968 to schedule a time to speak. If you are not a client and you don’t have a comprehensive Phase 2 retirement plan and roadmap built for you, reply to this email or call us at (571) 577-9968 to schedule your complimentary second opinion and Where Do I Stand Plan.  

As always, any and all questions are welcome. We are here for you. 
All our best,
Abe Abich & the Abich Financial Team