April 2023 Watchlist: Entry Points

Market Overview

Welcome back to The Wealth Catchers' watchlist. For the month of March the stock market was a bit mixed depending on which index you looked at. Also we had some major banks fail which sent a shockwave through the financial sector and led many investors to begin losing faith in the banking system. By now you have seen it everywhere that Silicon Valley Bank failed and had to be taken over by regulators. Another major bank failed as well, Signature Bank, but it was SVB that stole the headlines.

Fed & Monetary Policy

As of December 2022 SVB was the 16th largest bank in the U.S. Now SVB doesn't get the majority of its deposits from the everyday person like you and I. They specialize in banking for venture capital firms, so one depositor could easily have multiple millions in their account. For those that aren't aware our banking system operates off fractional reserve banking. This means that the money you deposit into a bank is used by the bank to make investments. This is how banks create profits and returns for themselves, they are only required to keep a certain amount in reserve. The thought is that not every depositor will come to the bank at once and try to withdraw their money, i.e. a bank run. This allows banks to invest or acquire assets like real estate, stocks, give out loans and purchase bonds. SVB used depositor funds to invest in long term government bonds, something that for the most part is a safe investment. The issue with this investment is that we as an economy were entering a high interest rate environment. When interest rates rise bonds lose value. Other assets classes like high yield savings accounts or CD's become more attractive leading to people selling off their long term bonds. We're at a point in time where the reward for short term investments are higher than long term ones. SVB overleveraged themselves into these long term bonds and when a few people got wind of it it caused a downward spiral. VC firms that were depositors started to realize that SVB made some bad investments and did not have enough capital to cover the depositors so they began pulling their money out. Thus a bank run began, within a matter of hours SVB became insolvent. This banking situation then spilled over to a question of what will the Fed do when it comes to interest rates? If you read through the February Watchlist you saw that there was plenty of speculation if the Fed would raise rates or pause the hikes in March, this was before the collapse of SVB and Signature Bank. The focus on what the Fed would do in response to this came into extreme focus because the regional banks would be greatly affected. Now when it comes to large banks like SVB they are attached to other smaller banks that they do business with. If the bank at the top of the mountain fails, that then trickles downs and causes other banks to fail, this is called contagion. Depositors see a large bank fail they then believe that the small banks would for sure fail as well and begin to pull their money out also. These depositors will turn elsewhere to put their money, most likely the biggest banks that are "too big to fail". This hurts the economy as well because this negatively impacts the regional and smaller banks that most likely would lend to small businesses or the everyday person. Now how does the Fed raising rates affect these banks? Banks exchange money with one another based off the Overnight Federal Funds Rate. This rate is what banks have to pay to one another to borrow from each other. Raising interest rates affect how high or low this rate will be. If it gets pushed too high then these regional banks can't borrow money to help them stay solvent which would then lead to more bank failures. The Fed was tasked with saving the banking system and battling inflation at the same time. Moving forward it can be speculated that at the next Fed meeting on May 3rd, 2023, the Fed interest rate will go up by 25 basis points (56% probability) or will be paused(44% probability). This is why we've seen a push to the upside lately. A pause in rate hikes is fully expected at the Fed meeting on June 14th, 2023 (59% probability). If you have any banking fears ensure sure that the bank you are doing business with is FDIC insured. This allows you to have up to $250,000 insured across all accounts if single. If married that amount doubles to $500,000 in total. Only ONE bank can insure you up to $250,000. If you need more insurance than that then open multiple bank accounts. You can also look to putting that money into investments with low risk such as bonds. Majority of brokerages are insured by the SIPC (Securities Investor Protection Act). The SIPC insures your assets up to $500,000. Now this is for insolvency, if your investments lose money or you're in some bad trades that's not what this insurance is for. It's to make you whole in the case of a brokerage becoming defunct and returning the assets that are owed to customers, Always be aware of the protections in place for your hard earned money and don't freak out about this if you don't have more than $250,000 in ONE bank. You're protected

Monthly Performance

At the close of month all the indexes were mixed. The Dow Jones (-0.35%), S&P 500 (1.57%), NASDAQ (4.56%), Russell 2000 (-6.52%). At the close of the month of January the VIX was at 18.70. At the close of the month the "Fear and Greed" index was at 49 indicating neutrality in the market.

Crypto & Digital Assets