Topic: Liquidity

Isn’t it amazing how different the market feels at the start of 2024 compared to last year? At this time last year, everyone was feeling pessimistic about the markets, bracing for a recession and expecting another down year. For now, the economy remains resilient, inflation continues to show signs of cooling and the S&P 500 has bounced back to within 1% of its all-time high, set in January 2022.

The markets continue to find ways to surprise investors and do the unexpected. We never know when a “black swan” event may arise, but that doesn’t prevent TV pundits and economists from making wild forecasts about market crashes or what cliff we may fall off next.

No matter what is in store for us in the year ahead, here are four keys to keeping your long-term plan on track:

1. Manage your election-year anxiety.

Political news will dominate the headlines for 2024, here in the United States and elsewhere. More than half of the world’s population will go to the polls this year, including last week’s election in Taiwan. As we all know, the U.S. election is set to be contentious and anxiety-provoking. 

Election uncertainty probably will trigger higher market volatility. Historically, the party that wins the election has had little impact on long-term market returns. As measured by the S&P 500, the 10-year annualized return of stocks from the start of an election year is over 10% for both Republicans and Democrats. If volatility arises this year, it will provide opportunities for investors who stay focused on long-term investments.

Red, Blue and You: Politics Don’t Matter Much for Investors

10-year growth of hypothetical $10K investment made in the S&P 500 Index at start of election year (USD)

2. Consider your cash carefully.

Cash may not be as attractive as we think this year. Investors shifted trillions of dollars into cash in 2022 and 2023. Money market funds are sitting at almost $6 trillion, a record level of cash. According to NDR data, money market funds added $1.4 trillion in 2023. 

Not all that money is from funds that came out of the stock market. Investors shifted money from bank deposits to money market funds to take advantage of the higher yields, as banks are offering less yield than a traditional money market fund. While it is important to have your rainy-day cash bucket, cash as a long-term investment might not be as attractive as you think. 

The risk is the opportunity cost of waiting to invest. The chart below compares stocks to cash over 10 years from May 2013 to May 2023; the market returned almost three times more than cash over that same time. That is the opportunity cost.

Cash vs. Stocks: Growth of $1M

3. Pay attention to innovation and diversification.

Artificial intelligence captured the heart of investors in 2023. We all know the story of the Magnificent Seven tech stocks and their effect on market returns last year. At the end of 2023, the 10 largest companies in the S&P 500 accounted for almost 31% of the market capitalization. With such a small number of companies accounting for a sizeable portion of market returns, diversification took a back seat last year until late in the fourth quarter.

Innovation is not going away as AI is still in the early stages of a long-term play. However, diversification remains essential. As seen in the chart below, asset classes perform differently from year to year — and rarely do the same ones remain at the top. Bonds failed to provide diversification in 2022, and that trend continued for much of last year. 

However, with inflation falling faster than expected and the Fed indicating that it is done raising rates, bonds rallied in the fourth quarter and ended the year in the positive. The end of a tightening cycle has historically been a good time to own bonds, providing additional diversification outside of equities.

The Periodic Table of Investment Returns

4. Remember that the markets are resilient.

Investors can always find reasons not to invest: war, interest rates, government strife, politics — almost 20 separate events over the last 25 years. Each one of those felt momentous at the time. Look at the chart below; notice the missed returns if you used those events as reasons not to invest.

Many of the worries that weighed heavily on the markets in 2023 have dissipated, but the markets and the economy still face plenty of risks. Undoubtedly, we will experience similar events going forward, but it is critically important to remember that markets are resilient — and historically, they have always bounced back.

Market Disturbances Are Inevitable and Frequent

MSCI All Country World Index

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, Fidelity, Kestra Investment Management, Marketwatch, YCharts

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

It’s important for investors to understand the 10-year Treasury and the significance of the yield-curve inversion.

A yield curve is a line that plots interest rates of bonds with equal credit quality but different maturity dates. There are three main shapes of a yield curve: normal (upward sloping), inverted (downward sloping) and flat. A normal yield curve, or upward sloping, is indicative of economic expansion, while an inverted yield curve points to an economic recession.

For the past 18 months, the yield curve has been inverted as the two-year Treasury bond has yielded more than the 10-year Treasury bond. That remains the case today, but the differential has shrunk because the 10-year Treasury bond yield increased significantly over the last month. The 10-year Treasury bond recently had a yield of over 5% for the first time since 2007.

The yield curve is now relatively flat, as seen in the chart below, with bonds almost equal in yield between three years and 30 years.

Treasury Yield Curve

Ultra-short-term rates are yielding more than long-term rates; the Fed has been pushing short-term rates up for the past 18 months to curb inflation.

A common misconception is that when the Fed raises the Fed funds rate, all yields rise in tandem. This usually is not the case. Short-term rates are tied to the Fed funds rate, whereas longer-term rates are tied to the outlook of the economy regarding growth and inflation.

The Treasury yield curve usually slopes upward, meaning longer-term securities yield more than shorter-term securities. Investors typically demand higher yields for locking their money up for a longer period.

What is the 10-year Treasury — and why is it so important?

The 10-year Treasury is a bond that pays interest plus repayment of principal in 10 years. The yield is the current rate Treasury notes would pay investors if they bought them today. Changes in the 10-year Treasury yield tell us a lot about the current economic landscape and global market outlook. 

The 10-year Treasury can indicate investor confidence in the economy. When the yield on the 10-year bond changes, it can indicate a shift across all borrowing rates, from interest rates on bonds to mortgage rates. The rising yield of the 10-year can be a barometer for interest rates on mortgages, student loans and other forms of borrowing. 

Also, the 10-year Treasury typically is used as the basis to value the future cash flows of companies to determine their market value. As the 10-year moves higher, those cash flows are discounted at a larger rate — and therefore, the values of the companies are worth less, compared to when interest rates are lower.

Several factors affect the yield on the 10-year Treasury; inflation and investor perception of the current economy are the two main factors. When the 10-year yield goes up, so do mortgage rates and other borrowing rates. When the 10-year yield declines and mortgage rates fall, the housing market strengthens, which has a positive impact on the economy. 

Higher 10-year bond yields have pushed the 30-year mortgage rates to 8% for the first time since 2000. Higher mortgage rates have hurt existing home sales, but limited housing supply has kept home prices from falling too much.

The 10-year also impacts the rate at which companies can borrow money. When the 10-year is high, like it is today, companies face more expensive borrowing costs that may reduce their ability to grow and innovate. Small businesses haven’t notably changed their capital spending plans yet, but obtaining financing going forward has become much more difficult. If businesses don’t have access to capital, that would potentially mean less investment in the future and fewer jobs.

The 10-year also can impact the stock market. Rising yields may signal that investors are looking for higher return investments, but the fear of rising rates could draw monies away from the stock market. Falling yields usually mean that borrowing rates will decline, making it easier for companies to borrow money and expand.

Global events also have an impact on Treasury yields. U.S. government bonds are considered the safest investment in the world, and when there is upheaval, Treasuries are in high demand from international investors, leading to lower yields.

Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity

Quoted on an investment basis

Why has the 10-year gone up?

The 10-year Treasury has surged since theFed ’s September report for several reasons:

• The economy remains resilient despite 11 interest-rate hikes over the last 18 months.

• GDP, a measure of all goods and services produced in the U.S., rose at a 4.9% annualized pace for the third quarter, growing faster than economists expected. The increase in GDP is due mainly to contributions from consumer spending.

• Inflation has stayed elevated at 3.7%, down considerably from the peak of 9.1%. Inflation pushes bond investors to demand higher interest rates to keep pace with rising prices.

• The federal deficit is approaching $2 trillion and growing, which may force the government to issue more bonds — pushing the price lower and rates higher.

It is likely that the Fed will keep rates at an elevated level to continue to bring inflation down. The market expects the Fed to cut rates in the later part of 2024. Historically, the Fed has paused rate hikes when it believed that the economic growth was about to contract and inflation was slowing. When that occurs, longer-term Treasuries usually decline along with short-term rates, as short-term yields move in advance of what the Fed is expected to do. It may be tempting to wait in cash and see if yields move even higher.

As we write often, it is hard to time the top or bottom of the stock or bond market. We often don’t know that yields have peaked until long after it happens.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, CNBC, Federal Reserve, Schwab, USA Today

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The first half of the year marked the second-best six month start for the S&P 500 this century, beaten only by 2019. The market is treading water so far in July, which seems appropriate considering the heat wave that has enveloped the country.

After cratering last year, technology shares carried the S&P 500 for the first half of 2023. Energy led the way for the S&P 500 last year, while technology brought up the rear, and the opposite has been true this year. The chart below shows a breakdown of the S&P 500 along with a comparison of market-weighted returns and equal-weighted returns.

The S&P 500 is a market-weighted index, with the largest stocks carrying the most weight. Apple, Microsoft and Amazon account for 17.62% of the S&P 500 Index. Due to the strength of returns for those three stocks in the first half, the return of the market-weighted S&P 500 index significantly outperformed an equal-weighted index.

In the equal-weighted index, each of the 500 holdings is roughly the same weight, with the largest holding being only .28% of the overall index. That’s a significant difference, compared to Apple being 7.66% of the overall market-weighted index. Since most of the return of the S&P during the first half of the year was from seven large-cap technology stocks, the equal-weighted index did not perform as well, with five sectors being negative.

A Tale of Two Markets

S&P 500 Performance by sector, year-to-date 2023

We often talk about average return, or what the market has averaged over a long period of time. As a reminder, the market is rarely average. Just look at the last three years, starting with 2020: a drastic drawdown to start the year with the global pandemic, followed by a steep recovery in the same year. Then 2021 was another strong year, only to see the bottom fall out in 2022 for both stocks and bonds. Over the last 72 years, the market has fallen in the “average range” only four times — a good reminder that the market seldom gains the average of 8-10% in a calendar year.

An Average Year Isn’t So Average

S&P 500 gains between 8-10% are quite rare (1950-current)

Wall Street strategists remain bearish on the market for a variety of reasons: stretched technology valuations, stubborn inflation, current money market and short-term bond yields, the commercial real estate recession and ongoing concern about regional and smaller banks. They are more bearish now than they have been anytime over the last 24 years for the final six months of the year. 

In other years when they expected a negative return over the final six months, we have seen the following returns, with the average return for those four years being 12.2% over the final six months: 
• 1999: +7%
• 2019: +9.8%
• 2020: +21.2%
• 2021: +10.9%

Wall Street Strategists Stick to Cautious Equity View

Their S&P 500 target points to the most bearish second-half outlook on record

• S&P 500’s second-half outlook implied by strategists’ average year-end target

Still, there is no guarantee of positive or negative returns for the rest of the year. Ample cash remains on the sidelines, waiting to be deployed. While investors have hunkered down in cash, this also suggests that this money could make its way into the economy and the markets. This can lead to paralysis and contentment with short-term cash returns, but it also can be detrimental to long-term financial goals. 

Every cycle is different, which makes investing amid uncertainty a challenge but also highlights the importance of being invested in a diversified portfolio. Equities historically have been the highest-returning asset class over the long run, and we do not see anything to alter that precedent going forward. We will continue to monitor the markets closely and make changes as necessary.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Blackrock, Bloomberg, Carson, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.

Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

As we approach the second half of the year, it’s a good time to look back at the trends that have shaped our economy so far. Inflation continued to ease each month, and U.S. economic growth slowed. The Fed continued to raise rates while signaling that we are closer to the end of the rate-hike cycle, and the U.S. government debt-ceiling standoff was resolved without a default (thankfully).

Artificial intelligence was the talk of the stock market for the first half of the year, and as we have written before, mega cap stocks led the market higher, with seven stocks accounting for most of the return of the S&P 500 through June.

Big Tech’s Performance vs. the Rest of the S&P 500

Through June 1

As we wrote last week, the stock market has rallied by more than 20% from the bottom in October 2022, and a new bull market has begun. Dating back to 1928, the S&P 500’s average return has been 7% over the six months after a rally of 20% follows a drawdown of 20% or more (like we saw during the first nine months of 2022). That is significantly higher than the average rolling six-month return of just 2.9%, as seen in the chart below. These findings suggest the possibility of further gains from here.

Drawdown Recoveries: What Happens Next?

Fixed income markets were positive for the first half of the year. Short-term yields, money markets, CDs and Treasury bills continued to offer attractive rates not seen for many years. Last week, the Fed kept the Fed Funds rate unchanged, ending a streak of 10 consecutive increases going back to March 2022. However, bank officials were quick to point out that the tightening cycle is not necessarily over. 

The Fed’s new summary of economic projections indicates that there still could be two more rate hikes to come. The question is whether the Fed is posturing and hedging its bets, as inflation fell again in May to 4%, still above the Fed’s target 2% level. It also is important to remember that it can take time for Fed rate hikes to work their way through the economy, often 12 to 18 months.

Here are some of the key indicators and trends we are watching for the second half of the year:

Leading Economic Index (LEI)

Used to predict the direction of global economic movements over the next few quarters, this index is comprised of 10 components whose changes tend to precede changes in the overall economy. There is still much discussion on a potential recession in the second half of the year — or whether one can be avoided altogether.  

Labor market

The unemployment rate is 3.7%, remaining near its all-time low but up slightly from its recent measure of 3.4%. For inflation to fall to its 2% target, the Fed needs to see continued weakening in the labor market and slower payroll growth.  

Credit crunch

Lending standards have tightened with higher interest rates and the effects of the Silicon Valley Bank failure. This may affect corporate earnings, which could lead to downside in the S&P forecast. There also is concern about the commercial real estate market, as a tremendous amount of debt needs to be refinanced this year. With interest rates still high, we could see a record level of default on commercial real estate property.  

Market breadth

As we wrote last week, we have started to see sectors other than mega-cap tech names beginning to rally. Technology had been the only sector with positive returns, but in June, we are seeing other sectors turn positive. A continued improvement in other sectors would bode well for the market during the second half of the year.  

Artificial intelligence

The first half of 2023 was all about ChatGPT and anything affiliated with artificial intelligence. Enthusiasm is elevated, and market valuations for some AI stocks are frothy as concerns about a repeat of the tech bubble of 2000 are starting to surface based on the first-half run of technology stocks. 

+++ 

The second half of 2023 may hold the potential for fewer surprises with a debt-ceiling deal in place until 2025, global central banks moving towards a pause on rate hikes, signs of potential U.S. and China tensions cooling, and bank stress stabilizing. We will continue to closely monitor the markets and adjust the portfolios as necessary.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: FactSet, Goldman Sachs, Horizon

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Last week, the financial markets experienced a shock not seen since the days of the Great Financial Crisis in 2008. The second-largest bank failure on record happened when Silicon Valley Bank (SVB) shut its doors on Friday after it was unable to meet the demands for its customers to redeem their money. SVB was a nearly 40-year-old bank that primarily served the tech world along with private equity and venture capitalists. 

Clearly, the sudden nature of SVB’s collapse caught the banking world by surprise. Within 48 hours, the bank went from trading over $300 per share to being shut down. Venture capital companies helped lead the run on the bank, withdrawing more than $42 billion by Thursday. The bank was mismanaged in many ways, and its management has questions to answer. SVB took in a large amount of deposits from 2019 through 2021. With those monies, the bank purchased longer-dated Treasuries to earn interest on the cash and help with the spread on what it was lending out. 

Over the last 12 months, the Fed has raised interest rates eight times. When rates rise, bond prices fall. Longer-dated bonds have more volatility, so their prices tend to fall more than shorter-maturity bonds. 

Last week, when SVB clients started to demand their monies as rumors of the bank’s losses mounted, the bank had to sell more bonds at a large loss due to the rise in rates. SVB had not put proper hedges in place to manage interest rate risk and exposed its clients to these losses. We do not believe that this is an industrywide issue or that there will be runs on other banks. 

A large percentage of the bank’s deposits were uninsured, i.e., over the FDIC-insured limits of $250,000 per person and $500,000 for a married couple. Many companies used SVB for their banking, and companies like Roku had an estimated $487 million in deposits at SVB. Smaller tech companies also had their cash there and are now trying to figure out a way to meet payroll. 

The Federal Reserve said it is taking actions to protect the U.S. economy by strengthening public confidence in the banking system. This step will ensure that the banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of SVB will be assumed by the taxpayer.

The Fed also announced a similar systemic risk exception for New York-based Signature Bank. All depositors of this institution will be made whole. As with the resolution of SVB, no losses will be assumed by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

As the week progresses, we should learn more about what the government, Federal Reserve or FDIC may do to continue to calm the waters.

Biggest Bank Failures

We want to remind and reassure you of the financial strength of Fidelity and the power of independence and team behind CD Wealth Management. The chart below outlines the approach CD Wealth takes with our clients. We do not take custody of any assets. We are the team that works with you to create your plan, oversee your monies and guide you on a daily basis. We invest your assets in the public, liquid markets. Your assets are custodied, or held, at Fidelity Institutional®. Fidelity is not a bank like SVB, or even Chase, Bank of America or Wells Fargo. Fidelity does not take in deposits to then make loans for homes, mortgages, businesses, etc. It is not investing your monies in bonds to make a spread on deposits as banks are. 

Fidelity is a clearing house to hold your monies, whether in cash, stocks, bonds, mutual funds or exchange traded funds. It is important to understand and feel confident that institutions like Fidelity and Vanguard are not in the same business as commercial banks. That is why we choose to use them and not blur the lines between banking and investment management.

Please know that we have full faith and confidence in the banking system today. Most importantly, we have full faith and confidence in where your monies are being held (Fidelity Institutional®) and in the money markets where your monies are being invested. Please do not hesitate to reach out with any questions that you have.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter.  In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, CNBC, FDIC, CD Wealth Management

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

As we near springtime, we find ourselves in a time of transition — is the weather going to be cold or hot? The economy also is in transition, and with lots of contradictions — are we going into a recession or not? Deteriorating economic indicators have had a strong track record of predicting recessions, but many have incorrectly warned of oncoming contractions. Soft and hard data hit recessionary levels in 2022, but the big question is whether the Federal Reserve and other banks will find a way to subdue inflation without causing a recession.

Labor remains strong, and inflation continues to show signs of cooling. Consumers are spending money, as seen in a retail sales increase of 3% month over month in January. Wage growth is slowing but remains fairly high. On the flip side, growth in average hourly earnings has slowed relatively quickly. The Fed has recently indicated concern that inflation in the service sector (not including housing) remains stubbornly high. However, weakening consumer spending suggests price growth will continue to slow. Banks have made it harder and more expensive for consumers and businesses to obtain credit and financing. 

With rates rising for mortgages, credit cards and auto loans, the Fed’s tightening policy is on track to slow consumption and demand. As we have written before, this is one of the two methods the Fed is employing to slow down inflation: reducing demand and increasing unemployment to slow wage growth. 

Global manufacturing has lagged following the pandemic as inventory shortages turned to gluts. Now, however, signs have started to emerge that manufacturing may be bouncing back as surplus inventories are down. Growth in manufacturing would be a good sign for the global economy. The tradeoff, though, is that such a recovery could prevent central banks from cutting interest rates, as many have predicted later this year.

With all the conflicting messages and information, we must continue to look ahead. We use leading economic indicators to point to future events; lagging indicators tell us where we have been, helping us confirm a pattern. Both serve a purpose, but the markets are forward-looking, often telling us what may happen ahead of time.

1. From a fixed-income perspective, last year we maintained a shorter duration in the portfolio as the Fed remains in a tightening cycle. The very short end of the curve has continued to rise, yielding to higher money market and Treasury rates. We feel that most of the interest-rate change is accounted for in the bond market. At the same time, in taxable accounts, we added a tax-free municipal bond position instead of a taxable bond fund, as municipal bonds offer great value in this market. We are watching the Fed closely for indications of the end of the rate-hiking cycle and will look to adjust the duration of the portfolio when there is further clarity.

2. Last year, we did a significant amount of tax-loss harvesting to take advantage of a down market. As we potentially enter a recession or a market bottom, diversification and active management should play a larger role. In 2022, both stocks and bonds fell together. Cash, some commodities and energy stocks were the lone survivors in an otherwise bad year. We continue to believe in both passive and active funds in the portfolios, depending on the asset class. We are swapping out passive investment in small-cap stocks for an active manager. At the same time, we are adding an exposure to emerging markets. In 2023, China is reopening after several years of lockdowns, and the dollar is weakening. The portfolios are not overweight in either stocks or bonds and have a good mix of growth and value. We feel the portfolios are prepared for either an upside surprise or continued volatility. 

We are anticipating and moving to those areas of strength in the economy — and in the stock market. We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. 

Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, GSAM, Investopedia, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.