Market commentary: Mar 2023
Portfolio performance
Over the last year the big question that markets have grappled with is inflation. How much? How high will it go? How long will it persist? And how high will the Federal Reserve and other central banks raise interest rates and will this cause economic recession? I see it in the headlines almost every day as markets digest the latest data and prices rise or fall depending on whether predictions are that rate rises will cease or continue. It’s counterintuitive but often markets go up on bad economic news as this could mean interest rates stop rising or even start to fall!
The overall result for our client portfolios can be described as a year of two halves with significant fall in value for all asset classes in the first 6 months to September, followed by partial recovery in the last 6 months for all asset classes. However, total return for the full year was negative.
It’s worth bearing in mind that the negative return is due to the fall in market value of bonds and shares (unrealised losses) which will recover when market sentiment turns. Also, that this was partially offset by cash income from interest and dividends – approximate return of 2.50% for the last year.
The collapse of Silicon Valley Bank – a crisis of confidence and trust
Following rumours that the bank was raising new capital because it was in trouble, Silicon Valley Bank (SVB) collapsed after depositors lost faith and withdrew funds on mass. Several other US banks then came under pressure leading to two further bank failures (albeit both were focused on the crypto sector).
Despite swift action by the US Federal Reserve to protect depositors and assurances from US President Joe Biden that savings in the wider system were safe, investors worried that other banks might be vulnerable. Contagion took hold. The share market value of the major US banks fell by US$190 billion over 4 days, and Credit Suisse (a major international bank based in Switzerland) had to be rescued via sale to its larger rival UBS. All very dramatic.
An overreaction by investors? It could be seen that way as fund manager analysis concludes the banking system is in good shape. Capital levels are high, credit losses are low and profitability for most banks is solid. Combined with the rapid response from regulators this indicates the risk of a financial crisis is low.
It just goes to show how important (and fickle) confidence and trust are, and when tested how quickly and severely markets react. Anyhow, looking at a recent headline it seems confidence has been restored and we all move on….
“A semblance of calm has returned to world markets in the final week of the quarter as the banking storm abates and the spotlight switches to…..” Reuters, 29 March 2023.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser