Author: Minich MacGregor Wealth Management

Volatility in the banking industry almost always means volatility in the markets, and there was a lot of both last week.

As you know, Silicon Valley Bank (SVB) was seized by federal regulators on Friday, March 10. It was not the first bank to collapse this month, nor was it the last. Two days earlier, Silvergate Bank, another California institution, announced it would liquidate its assets and wind down operations. And two days after the SVB collapse, regulators closed a third bank. This was Signature Bank, based out of New York.

What do these banks have in common, besides sharing a similar fate? Well, all three were hit by bank runs in the days prior to their collapse. All three had made ill-timed investments in recent years. For Silvergate and SVB, this was in the form of overexposure to government bonds, which dropped in value as interest rates skyrocketed. For Signature – and Silvergate, too – the trouble really started when the price of bitcoin and other cryptocurrencies plummeted in 2022.

Over the weekend, investors, not to mention the many companies with their deposits on hold, waited with bated breath to see what the government’s response would be. After all, everyone still remembers what happened in 2008. Back then, panic spread across the entire banking industry – and from there to the overall economy. Unfortunately, some of that panic came because the government stepped in and then didn’t, which left investors with uncertainty.

“Contagion” is a very real thing when it comes to banking, and no one wants a repeat of the financial crisis. In recent days, other banks that have not collapsed, have strong balance sheets, and are not necessarily in danger, still saw their stock prices fall dramatically. This partly came due to how connected individual stocks are with index fund trading and partly because investors run if they catch even a whiff of financial instability.

As it turns out, Washington moved swiftly and decisively to stamp out uncertainty. On March 12, the Federal Reserve created the Bank Term Funding Program. This program will provide emergency loans for up to one year to safeguard 100% of deposits to any bank or credit union that needs it.1 (Normally, only the first $250,000 of an account’s deposits were insured against loss. Most of the organizations doing business with these three banks stood to lose much, much more than that.) In return, these banks must put up any Treasuries or highly rated debt they own as collateral and pay a modest interest rate.

The idea here is to stabilize all the regional banks around the country by assuring customers their money is safe. Furthermore, the program is designed to make it easier for banks to get needed liquidity instead of selling their assets off in a fire-sale.

A couple things to note about this program:

First, this is not a “bank bailout” in the traditional sense. The banks themselves are not being saved or spun off to other, larger banks. Furthermore, both bond- and stockholders of these banks will still likely experience a loss in the short term. This program is designed solely to protect depositors. (Of course, the exact definition of a “bailout,” and whether one is justified or not, is a topic best left to politicians.)

Second, to pay for all this, the government will draw from the Deposit Insurance Fund. This fund comes from quarterly fees levied on financial institutions. Public taxes will not be used.2

So, what does all this mean for the future? What does it mean for us?

There are several things we as investors need to be aware of:

1. More volatility. The government’s actions temporarily stabilized the markets early in the week. But the major indices dropped again on Wednesday when an important European bank was found to be in financial difficulty, albeit for different reasons and has been in decline long before these failings. In the short term, investors will be hypersensitive to any banking instability. That means volatility is still very much in the cards.
2. Politicization. Right now, politicians and pundits on both sides of the aisle are trying to turn this issue into the latest political football. As investors, we must avoid getting caught up in all that and remain focused on keeping to our investment strategy.
3. Interest rates. There’s a lot of chatter on Wall Street right now that this issue will cause the Federal Reserve to delay more interest rate hikes. If that happens, it’s quite possible the markets will go up. But we do not make guesses about which way the markets will go or what the Fed will do. In fact, you can make an argument that doing so is partly why SVB got into so much trouble.

So, that’s where things stand right now. Obviously, there’s a lot our team will be monitoring in the coming weeks. In the meantime, our advice to you is to enjoy the start of Spring! Whenever anything changes, we’ll let you know immediately. And as always, do let us know if you have any questions or concerns.

If you haven’t already contributed to an IRA (Individual Retirement Account), there’s still time to do so. Many people don’t know that the 2022 contribution deadline is April 18, 2023.¹ However, if you do decide to contribute, you must designate the year you are contributing for. (In this case, 2022.) Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact us if you have any questions or need help.

For 2022, the maximum amount you can contribute is $6,000. Or, $7,000 for those over the age of 50.² This applies to both traditional and Roth IRAs. If you’re unsure whether to contribute, remember:

• Contributions to traditional IRAs are often tax-deductible. And while distributions from IRAs are taxed as income, your tax rate after retirement could possibly be lower than it is now, lessening the impact.
• Contributions to a Roth IRA, on the other hand, are made with after-tax assets. However, the advantage of a Roth IRA is that withdrawals are usually tax-free.
• Whichever type you use, IRAs provide a great, tax-advantaged way to save for retirement.

If you have yet to set up an IRA for 2022, you can still do that. The deadline to establish an IRA is also April 18th. In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.

If you have any questions about IRAs – whether one is right for you, how it should be managed, or anything else – please give our team a call. We’d be happy to help you.

1 “IRA Year-End Reminders,” Internal Revenue Service, https://www.irs.gov/retirement-plans/ira-year-end-reminders

2 “IRA Contribution Limits,” Internal Revenue Service, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

Simple question: How’s the economy doing?

Answer: It’s complicated.

After the Federal Reserve hiked interest rates again (but less than last time) and all the market volatility, it’s a good time to talk about the economy.¹

Inflation has been falling since summer

Inflation fell for the sixth straight month in December, bolstering evidence that it may have peaked last June at 9.1%.²

However, inflation is still very high, and its impact is being felt across the economy.

The jobs market is still very strong

The latest January jobs report was a blowout, coming in ahead of the data that Fed economists expected. The economy added over 500,000 new jobs and the unemployment rate fell to the lowest level since 1969.³

You can see in the chart above that most industries are still actively hiring, suggesting that Fed actions still haven’t slowed the desire for workers.⁴

The economy shrugged off recession worries in Q4

Despite all the recession doom and gloom, the economy grew 2.9% in the last three months of 2022.⁵

However, consumer spending weakened slightly, indicating that Americans might be trimming expenses. Since consumer spending accounts for 70% of economic growth in the U.S., it’s a potential warning sign we’re keeping tabs on.

I see a few takeaways about the current state of the economy

But, before we dive into them, we want to point out two important caveats about economic data:

1. Much of the initial data we see in the headlines is based on incomplete estimates that get revised later as more data is processed. These big data bureaus try to balance releasing data quickly enough to be useful and getting the complete picture.
2. Data is often impacted by seasonal trends that can cause spikes or “noise” in the data. That’s why we look for trends rather than single data points.

Here’s what we see:

Despite tech layoffs and gloomy headlines, many sectors seem to still be going strong, job-wise.

Interest rate hikes aren’t slowing down growth as much as the Fed hoped, though inflation is definitely showing a downward trend.

While recession fears are definitely real and based on solid concerns, it doesn’t look like the economy has hit the skids yet.

What does all this mean for future Fed interest rate moves?

That’s the trillion-dollar question, isn’t it?

We don’t have a crystal ball, but we’ll give it a shot.

It’s possible that more interest rate hikes are coming.

We think folks expecting a quick pivot away from increases are going to be disappointed.

But any future rate hikes may be smaller and slower paced as the Fed takes stock of what the data is showing and works to keep us out of a recession.

Federal Reserve chair Jerome Powell has admitted that inflation has begun to fall but he wants to see “substantially more evidence” of a declining trend before changing policy.¹

With inflation still three times above the Fed’s 2% target, there’s still a long way to go before we’re out of the woods and back on the path.²

What could happen with markets?

We expect a lot of volatility ahead as markets digest every shred of information about the economy and the direction of interest rate policy.

We don’t have a crystal ball here, either, but we think it’ll be a rocky spring. So, we’re watching markets, we’re reading analyses and reports, and we’re looking for opportunities.

Do you have any questions? Would you like to talk anything over? Contact us and we’ll find a time to talk.

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Sources

1. https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html
2. https://tradingeconomics.com/united-states/inflation-cpi
3. https://www.reuters.com/markets/rates-bonds/feds-kashkari-says-hes-sticking-54-rate-hike-view-after-surprising-jobs-report-2023-02-07/
4. https://www.bls.gov/charts/employment-situation/employment-by-industry-monthly-changes.htm
5. https://www.cnbc.com/2023/01/26/gdp-q4-2022-us-gdp-rose-2point9percent-in-the-fourth-quarter-more-than-expected-even-as-recession-fears-loom.html

Happy Presidents’ Day! 

As you know, this holiday was originally set aside to honor George Washington’s birthday. But as Abraham Lincoln’s birthday is also around this time of year, many states began celebrating the two dates together. More recently, the day has become dedicated to all presidents.

Recently, we came across a speech about Abraham Lincoln given by a man named Phillips Brooks. But this was no ordinary address. It was, in fact, a eulogy for our sixteenth president.

Lincoln was assassinated on April 14, 1865. Most people don’t realize this was Good Friday – an important holiday for many people. It was also the start of the Easter weekend, a time when churches around the country would fill to capacity. But on that weekend, religious leaders were suddenly faced with a dilemma: How to comfort thousands of grieving, bewildered people. People mourning the sudden, unthinkable death of their president.

Phillips Brooks was one of these leaders. As the rector of one of the largest churches in Philadelphia, he wrote down his thoughts about Lincoln for a eulogy that he delivered the following weekend. The same weekend when Lincoln’s body passed through Philadelphia on its way back to Illinois.

In honor of the holiday, we thought we would share a few excerpts with you. While Presidents’ Day is not as celebrated as, say, July 4 or Memorial Day, we think Brooks’ words perfectly illustrate why it still matters. They also illustrate why we were so lucky to have a man like Abraham Lincoln as president of the United States.

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The Life and Death of Abraham Lincoln
by the Reverend Phillips Brooks¹

While I speak to you today, the body of the President who ruled this people is lying honored and loved in our City.  It is impossible for me to stand and speak of the ordinary topics which occupy the pulpit.  I must speak of him today; and I therefore…invite you to study with me the character of Abraham Lincoln, the impulses of his life, and the causes of his death.  I know how hard it is to do it rightly, how impossible it is to do it worthily.  But I shall speak with confidence because I speak to those who love him.

We take it for granted, first of all, that there is an essential connection between Mr. Lincoln’s character and his death.  It is no accident, no arbitrary decree of Providence.  He lived as he did, and he died as he did, because he was what he was. 

In him was vindicated the greatness of real goodness and the goodness of real greatness.  The twain were one flesh.  Not one of all the multitudes who stood and looked up to him for direction with such a loving and implicit trust can tell you today whether the wise judgements that he gave came most from a strong head or a sound heart.  If you ask them they are puzzled.  There are men as good as he, but they do bad things. There are men as intelligent as he, but they do foolish things.  In him goodness and intelligence combined and made their best result of wisdom. 

Mr. Lincoln’s character [was] the true result of our free life and institutions.  Nowhere else could have come forth that genuine love of people, which in him no one could suspect of being either the cheap flattery of the demagogue or the abstract philanthropy of the philosopher, which made our President, while he lived, the center of a great land, and when he died so cruelly, made every humblest household thrill with a sense of personal bereavement which the death of rulers is not apt to bring.  Nowhere else than out of the life of freedom could have come that personal unselfishness and generosity which made so gracious a part of this good man’s character. 

How many soldiers feel yet the pressure of a strong hand that clasped theirs once as they lay sick and weak in the dreary hospital.  How many ears will never lose the thrill of some kind word he spoke – he who could speak so kindly to promise a kindness that always matched his word.  How often he surprised the land with a clemency which made even those who questioned his policy love him the more; seeing how the man in whom most embodied the discipline of Freedom not only could not be a slave, but could not be a tyrant.  In all, it was a character such as only Freedom knows how to make. 

[Now], the new American nature must supplant the old.  We must grow like our President in his truth, his independence, his wide humanity.  Then the character by which he died shall be in us, and by it we shall live.  Then Peace shall come that knows no War, and Law that knows no Treason, and full of his spirit, a grateful land shall gather round his grave and give thanks for his Life and Death. 

He stood once on the battlefield of our own State, and said of the brave men who had saved it words as noble as any countryman of ours ever spoke.  Let us stand in the country he has saved, and which is to be his grave and monument, and say of Abraham Lincoln what he said of the soldiers who had died at Gettysburg: ‘That we here highly resolve that these dead shall not have died in vain; that this nation, under God, shall have a new birth of freedom, and that Government of the people, by the people, and for the people, shall not perish from the earth.’ 

May God make us worthy of the memory of Abraham Lincoln. 

We hope you enjoyed reading these words as much as we did. We wish you a very happy Presidents’ Day! 

¹ “The Life and Death of Abraham Lincoln,” by the Rev. Phillips Brooks, April 23, 1865.  http://name.umdl.umich.edu/ACK8574.0001.001