VIDEO: After SVB’s Collapse, Will The Dominoes Fall?
Welcome to my latest Mind Over Markets video presentation. The article below is a condensed transcript; my video contains additional details and several charts.
After a strong rally kicked off 2023, bearish sentiment has come back with a vengeance. Not only has the stock market slumped, but the words “financial contagion” are being bandied about on Wall Street.
Last Friday, the Federal Deposit Insurance Corporation (FDIC) seized the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the depths of the Great Financial Crisis in 2008.
Silicon Valley Bank, based in Santa Clara, California, was the largest bank serving Silicon Valley companies. The bank’s collapse occurred after Silvergate Capital, based in San Diego and one of the biggest banks dealing in cryptocurrency, voluntarily began liquidation Wednesday.
Rising interest rates and a run of deposit withdrawals pressured Silicon Valley Bank and Silvergate. The news of their implosion sent the broader stock market into a tailspin, with the major U.S. indices closing the week with sharp losses.
Regional banks that focus on niches appear to be the most vulnerable. On Sunday, New York City-based Signature Bank (NSDQ: SBNY) closed its doors, after state regulators decided that allowing the bank to stay open would undermine the stability of the wider financial system. The FDIC was named as the receiver.
Signature has a large real estate portfolio; the bank recently made a big foray into attracting cryptocurrency deposits. That proved a misguided strategy. The crypto market has since melted down, in the wake of the FTX scandal.
Bearish technical omens emerged last week, as the NYSE Advance/Decline Line, S&P 500, and NASDAQ 100 all broke below their 200-day moving averages.
The 200-day moving average is the average closing price of a stock or an index over the previous 200 days. The 200-day moving average serves as a support level when the price is above the moving average or a resistance level when the price is below it.
This bear market is now 298 days old, putting it just a few days sort of the average age of a bear. All bear markets end, and when they do, a new bull market is born. What’s more, the S&P 500 put in a dismal performance in 2022; history also shows that back-to-back yearly losses for the stock market are rare.
But last week’s bank failures have soured Wall Street’s mood. Are other banks about to suffer the same fate? Silicon Valley Bank was the 18th largest bank in the U.S. The majority of its clients were technology companies; the tech sector will feel the pain for a long time, perhaps for years.
The tech “disruptors” get disrupted…
The FDIC has stepped in to place Silicon Valley Bank into receivership. In its place, the FDIC will open the Deposit Insurance National Bank of Santa Clara on Monday, March 13, to return funds to insured depositors.
But here’s the rub: SVB’s customers were mostly tech firms, start-ups, venture capital firms, and wealthy individuals. Only a tiny percentage of the bank’s account balances fall under the $250,000 limit of FDIC insurance.
Immediately before the run on the bank’s deposits, less than 6% of SVB’s total deposits were covered by FDIC insurance. That said, regulators promised Sunday that all depositors at SVB and Signature would be paid in full.
The weakening of Dodd-Frank regulations in recent years helped pave the way for this still-unfolding banking fiasco. Notably, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 eased capital requirements for regional lenders.
SVB’s collapse is sowing turmoil in the tech sector, especially among smaller firms that were left holding the bag. It’s too early to say how the SVB fiasco will pan out; other undercapitalized regional banks could topple, too.
Fed Chair Jerome Powell last week vowed to cool the economy to fight inflation. He could be getting more of a downturn than he bargained for, in the form of a liquidity crisis.
Wall Street’s “Wrong Way Corrigan”…
As my readers know, I’ve often held up CNBC’s Jim Cramer as a contrarian indicator. Back in March 2008, during the Great Financial Crisis, he told his viewers that investment bank Bear Stearns was just fine, right before Bear Stearns collapsed.
Well, Jim Cramer has done it again. Last month, he tried to assuage mounting concerns about SVB Financial Group (NSDQ: SIVB), the parent of Silicon Valley Bank.
Cramer even went so far as to say on his TV show that SIVB was a compelling buy and the stock was ripe for a rebound. However, shortly after Cramer’s soothing words, the FDIC seized Silicon Valley Bank’s assets and California regulators shut it down.
As I pointed out in an article on March 3, a new actively managed fund came into existence this month: the Inverse Cramer Tracker ETF (CBOE: SJIM) that allows investors to bet against the host of CNBC’s “Mad Money.” Draw your own conclusions.
The week ahead…
Here are the major economic reports scheduled for release in the coming days:
NFIB Optimism Index and consumer price index (Tuesday); retail sales, producer price index, and homebuilders survey (Wednesday); initial jobless claims and housing starts (Thursday); industrial production, U.S. leading economic index, and consumer sentiment (Friday).
The big news, of course, will be the inflation indicators, which arrive just before the Fed’s next meeting March 21-22.
As I’ve just explained, financial contagion is a very real threat. That’s why I urge you to consider our premium trading service, the Weekly Cash Machine, helmed by my colleague Dr. Joe Duarte.
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John Persinos is the editorial director of Investing Daily.