MARKET RECAP

Stocks took a big hit, falling by 5.06% in the US and 3.44% outside the US. Bonds rallied on lower interest rates. The fall in US markets put equities back below the declining trend line and lower than the 200-day moving average. On Tuesday, Fed Chair Powell’s comments indicated a chance of a 50 basis point increase at the next Fed meeting, a hawkish stance. Then, on Friday, the Silicon Valley Bank (SIVB) failed.

SIVB was taken over by regulators.  The bank had $200 billion in assets and was the second biggest bank failure of all time, trailing Washington Mutual ($300 billion) in 2008. The bank relied on private equity funding as compared to regular deposits while at the same time having a very high level of loans. The vast majority of the assets the funds held were classified as “hold-to-maturity,” which means the bank did not have to mark the bonds to market. Given the dramatic increase in interest rates, the bonds had substantial unrealized losses. It wasn’t that the bonds were not creditworthy, just that the duration mismatch (holding long-term assets while having short-term liabilities) left SIVB susceptible to a bank run, and that is what happened. Even before the “run,” customers pulled money from SIVB to get higher interest rates elsewhere. What happens now remains to be seen. But the first casualty might be the Circle stablecoin, which had $3 billion of its $40 billion in reserves at the bank.

The failure sent yields plunging. The 2-year treasury yield fell by 31 basis points on Friday to 4.59% and 45 basis points over two days.

The February jobs number outpaced estimates. Nonfarm payrolls were up by 311,000 compared to the estimate of 215,000. The rise in average hourly earnings was only 0.2%, less than expected. And there was higher participation. Overall a good report, but the bank failure entirely overshadowed this.

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