The closing of banks and the whirlwind of activity over the weekend for banking will have important long-term implications for the economy and for the financial services sector.
Individuals with deposits in banks should be comforted by the forceful action taken by the Fed, Treasury, and FDIC to protect cash deposits. Cash deposits will be backed above the standard $250,000 of FDIC insurance. The Fed also will allow some bank asset holdings to be valued “at par”, offsetting the “marked to market” declines in value as interest rates rose the past year. This allows banks to find liquidity to meet depositor demand for cash, rebuilding trust in the banking system.
Due to these strong interventions, we consider the current banking crisis to be much less severe than what occurred in 2008 for the financial services sector, and a relatively minor event for other sectors.
Depositors have been protected and systemic risk has been limited. There are, however, long-term implications from this wake-up call. Regulatory oversight will increase, and the structure of the financial sector—especially for lending and balance sheets—may change.
Investors and markets are flying to quality: bonds have rallied, financial services stocks struggle and other sectors show mixed results. Expectations for Fed rate hikes have changed. Futures now point to fewer hikes, an earlier and lower peak in rates, and an earlier eventual cut in rates. With a lot of news and investment repositioning, it will take time for markets to settle.
We are changing our outlook modestly to reflect a slight drag on economic and earnings growth due to likely additional scrutiny and regulation of the banking sector. It is typical after a crisis for some malaise to settle in. We think it likely that the ebullience and excess of the pandemic era—such as meme stocks—has come to an end. We expect slow economic growth, a moderation of Fed rate hikes to one 25bps hike next week, and gradually improving inflation.
Overall, we expect a closer focus on balance sheets, and we expect high-quality investments with strong management and clean balance sheets to do well.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Teeeter. No part of the Mr. Teeter’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. © Silvercrest Asset Management Group LLC