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March Left Like a Lamb

March Left Like a Lamb

April 10, 2023

”March comes in like a lion and leaves like a lamb.” This old saying was proven true once more; at least when it came to the markets last month. The banking crisis that started with Silvergate Capital announcing they were closing their bank operations, and ended with Credit Suisse being acquired by UBS without shareholder approval (not a normal occurrence), did little to disrupt the markets once the FDIC, Federal Reserve, and the Treasury Department stepped in to prop up bank depositors’ confidence by guaranteeing all deposits on the distressed regional banks. This situation really could have been much worse, but for now, it seems that order is being restored. In fact, the turbulence of these bank shocks caused Treasury bond yields to fall, which helps strengthen the balance sheets of banks. Once again patience and perseverance paid off in March; the S&P 500 finished the month positively.

Now that the smoke has cleared a bit, we can assess what this means going forward in regard to the economy, the markets, and in turn, your portfolios:

  1. The regional banking crisis in March revealed some real chinks in banks’ armor. The Federal Reserve will need to take an extra hard look at banks’ balance sheets to make sure they are healthy enough to sustain the higher rates the Fed has delivered since last year.
  2. Regional banks will probably make less of a profit in the future as they will need to compete for cash leaving savings accounts and going into higher-yielding money markets. Big banks may not have this same issue as they are perceived to be “safer” and have actually had a healthy flow of deposits due to the regional bank crisis.
  3. Regional banks provide much of the credit to small businesses (the growth engine of the economy), and much of the funds they use for the loans come from deposits that customers bring in. If regional banks are seeing deposits flow to higher-yielding money markets and bigger banks, they will have fewer deposits to work with to provide loans to small businesses and consumers. This will have a drag effect on the regional banks’ profits and the economy, possibly causing it to slow down.
  4. Since the regional banking crisis started over a month ago, the market has lowered its end-of-year expectations for the Fed Funds Rate to 4.25-4.5% from 4.75-5.00%. This is 0.50% lower than what the Fed Funds Rate is today. Yes, this means the market is expecting the Fed to cut rates this year, possibly starting in November according to the CME FedWatch Tool.
  5. Recent manufacturing and services data has shown some slowing previous to the regional banking crisis, so any further slowing caused by slower lending will only exacerbate the pending economic slowdown. According to Bankrate’s recent survey of economists, there is a 65% chance of a recession in the next 12 to 18 months.
  6. Many publicly traded companies, such as companies you own in your portfolios, have already started preparing for the long-expected recession by laying off workers and repeatedly discussing “efficiencies” in their companies. This started with tech companies but has started to spread to other industries, as well. The most recent job openings data showed companies have reduced the positions they had open. We are now back down to levels not seen since May of 2021, and the labor force participation rate ticked up to 62.6% - the highest level since covid started.

Okay, enough with all the boring data. What are our thoughts going forward and what are we doing to prepare for future possibilities? A couple of things:

  1. We feel it’s best to eliminate as much exposure to regional banks as possible, right now. It’s not that we think they will go bust, but sentiment in that industry of the financial sector is so poor that it will be a good while before it recovers. So, why play around? That’s why we have been selling our position in Citizen’s Financial Group and redeploying that capital to Charles Schwab where we feel it is better utilized.
  2. We don’t know if the Federal Reserve will lower rates this year. There is a strong argument to be made that they may increase rates one more time in May and leave the rates there for a while. We don’t want to be too optimistic about the Fed reducing rates because that would cause us to take undue risk in the portfolios. The Fed has continually stated that they are “data dependent,” and right now the data has not suggested they are ready to start cutting rates.
  3. April is historically a very strong month for the market, especially during years following a negative year like last year. However, looking forward to the summer and early fall, there is reason to believe we’ll be in for some volatility. So, at this time we are positioned more defensively than the norm, but not so defensively that we miss some good return opportunities. If we can get to the end of November relatively unscathed, we think the end of the year could turn out pretty decent.
  4. Lastly, some of the big tech names, like Microsoft and Apple, have gotten a little expensive, and although they provided some nice gains last quarter, we have reduced our position size in them to bring them in line with our expectations. This has less to do with our thoughts on the quality of the companies and more to do with risk management. It has gotten to the point where those two companies alone make up almost 15% of the S&P 500's size. Historically, when companies get to be that overweight in the S&P, they usually have a hard time achieving further gains.

That’s all for now. Please, please, please… If you have any questions, do not hesitate to contact us. We can’t say this enough: YOU are the reason we are here. We will continue to try and provide you with the best service possible. Please forward this message to anyone you think may benefit from it. Thank you!



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.