A lot going on these days, to say the very least. There is an old saying that when the Fed tightens, it does so until something breaks. Well, this quarter, something broke.
As we discussed in a recent letter on the subject, the Fed drove interest rates sharply higher over an historically short period of time, catching bond investors by surprise and creating losses in bond portfolios. For Silicon Valley Bank (SVB), those losses proved fatal. The bigger questions center on the rest of the banking system, especially the regional banks.
At this point, the situation appears to have stabilized, and regional bank stock prices are recovering. That is good news. Equities and bonds produced positive returns for the quarter, more good news. On the other hand, Credit Suisse, one of the two largest Swiss banks, had to be taken over by UBS in a rapidly arranged shotgun marriage orchestrated by the Swiss government.1
To summarize our thoughts, things seem to be stabilizing and we are looking at a mix of troubling issues and good opportunities. Investing is never clean and simple, and oddly enough, it often looks and feels safest at times of increased risk. The fact that we see serious issues with the economy and the financial system does not imply that risk is higher now or that future returns on equities and bonds will be lower or negative. Historically, staying on track during difficult times like these has been a winning strategy.
So Tell Me Again, What Just Happened Here?
We got a bit of a scare when we had a sharp spike in interest rates last year, driven by an aggressive Fed trying to catch up after allowing the inflation genie to escape the bottle. We saw the decline in bond prices in portfolios, but for a long-term investor that was a manageable setback. On the other hand, banks suffering such losses in portfolios funded by short-term deposits had a much more serious problem. We saw two rapid collapses – SVB and Signature Bank (although Signature Bank’s issues were partly crypto-related). Prices of regional banks like First Republic plummeted as well.
As we described in our recent letter, these two banks were not at all typical, and while other banks have the same issue with losses in their bond portfolios, it is not to the same extent or impact. We also wrote a letter about Schwab, as the fact that they have a large bank and a bond portfolio with losses created some doubts and some headlines. We pointed out the differences between Schwab and SVB and that client portfolios were separate from bank assets (except for cash sweep accounts). There are still questions about their near-term profitability, and the stock price has declined as a result, along with the prices of other major banks2 All that being said, no one is expecting a major issue for banks or depositors going forward, although we may well see a shift of assets towards the largest banks and a tightening of lending.
But Equities and Bonds Were Up This Quarter… Is That Good News?
Actually, there is a fair amount of good news these days, even as we experience volatility and turmoil in many areas, economic, political, and military. After substantial declines in equities and bonds in the first nine months of 2022, we finished the year with a very good quarter and continued making progress in the first quarter of 2023. The S&P 500, after a lot of fluctuation, ended the quarter up around 7%,3 and the yield on the 10-year Treasury note fell sharply, ending at 3.48%.4
And if you are looking for a break from the stress of financial markets and love classical music, here is a little bit of good news.
Apple Music Classical
If you enjoy music streaming, as I do, and if you also love classical (and Baroque) music (ditto), then you are probably aware of and annoyed by a longstanding problem. But we may finally have a solution or at least a good beginning.
Starting with iTunes, music management software has been designed around individual songs. It added albums as an afterthought, but the user could search for music by artist and even by album with patience and persistence. You could find Billy Joel’s “Piano Man” or “With the Beatles.” You only had two variables, the artist and the song or album. Simple.
But how about finding three of the best recordings of Mozart’s Piano Concerto #21? How about recordings by Murray Perahia and the English Chamber Orchestra? Think of all the variables, including composer, performer, orchestra, venue, period, style, and more. Good luck even finding a good album, never mind organizing a collection.
To solve this challenge of accessing, analyzing, and managing such an enormous amount of data, Apple acquired a small company in Amsterdam called Primephonic. Conservatory-trained musicians fluent in code had created the database and had the talent Apple needed. Apple has now released this new App specifically for classical music; Apple Music Classical comes with the regular Apple Music App.
You can read more about the App in this article5; it is far from perfect, but I can’t wait to try it this weekend. If you try it, please let me know what you think about it–I would love to hear from you. And we all need some enjoyment and relaxation in these troubled times
So Are We Out of the Woods Yet?
No, unfortunately, we still have issues. I try to look on the bright side, and it is important to see the good as well as the bad. But we still have inflation, we may well be heading into a recession, the war rages on in Ukraine, and China continues its saber-rattling. Much of the equity rally this year has not been the broad base of reasonably priced stocks reflecting the economy as a whole– we are back to Big Tech driving the lion’s share of the upside, as there is plenty of excitement with the rollout of artificial intelligence applications like Chat GPT. While the S&P 500 was up 7% for the first quarter, the Dow was flat (+0.4%) but the tech-heavy NASDAQ index was up 17%.6
This quarter looks like an exercise in muddling through–the worst did not happen, and the best looks unlikely, but the messy middle held up, and we had a second good quarter in a row. I’ll take it.
- Kowsmann, Patricia. “Swiss Prosecutors Probe State-Backed Credit Suisse Takeover by UBS.” WSJ, 2 Apr. 2023, wsj.com/articles/swiss-prosecutors-probe-state-backed-credit-suisse-takeover-by-ubs-dceb5bde.
- Grant, Charley. “Stock Market Today: Dow Closes up 400 Points, Indexes End Quarter Higher.” WSJ, 31 Mar. 2023, www.wsj.com/livecoverage/stock-market-news-today-03-31-2023/card/schwab-stock-is-having-its-worst-month-since-1987-j2hDyDtfiFeVX3GSPsgz.
- Source: Morningstar Direct. Data as of 3/31/2023.
- “Resource Center: Daily Treasury Par Yield Curve Rates.” U.S. Department of The Treasury, 30 Mar. 2023, home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202303. Accessed 1 Apr. 2023.
- Cohen, Ben. “Apple Wants to Solve One of Music’s Biggest Problems.” WSJ, 30 Mar. 2023, www.wsj.com/articles/apple-music-classical-app-3325c6ba?
- Evans, Brian. “Stocks Close Higher Friday, Nasdaq Notches Best Quarter Since 2020: Live Updates.” CNBC, 31 Mar. 2023, www.cnbc.com/2023/03/30/stock-market-today-live-updates.htmlwww.cnbc.com/2023/03/30/stock-market-today-live-updates.html. Accessed 1 Apr. 2023.
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