U.S. stocks managed to eke out a gain last week as concerns continued over bank liquidity needs. Another shoe dropped late last week when Germany’s largest lender, Deutsch Bank saw it’s share price tumble over the same concerns affecting other banks. Also last week, Swiss officials strongly suggested UBS Group buy failing Credit Suisse. Hemorrhaging deposits, Switzerland’s second-largest bank was struggling to meet withdrawal demands. An interesting side note to this: While Credit Suisse shareholders will recoup part of their investment, holders of the banks Additional Tier 1 bonds will suffer a complete loss. Usually, bondholders are ahead of shareholders in a liquidation or forced sale. The roughly $17 billion loss will be born mostly by Europeans where the bonds were sold.

As a refresher, during years of historically low interest rates, banking institutions are facing losses on government bonds they purchased several years ago. Due to central banks raising interest rates to fight inflation, paper losses are on the books of likely every major and mid-size bank. If they were able to hold the bonds to maturity, they would be fine. But, in a age when speculation can take on a life of its own with social media, banks are facing mass withdrawals forcing them to sell the bonds at a loss to meet customer demand for funds.

After nine consecutive rate increases, the Fed said their latest 0.25% increase last week might be its last for a while. Fed Chairman Jerome Powell said the central bank may wait to see how the banking situation might affect inflation and the economy. This brings the benchmark federal funds rate to a range of 4.75% – 5%, the highest level since 2007.

The release of the statement by Powell said it was too soon to soon to determine how much the recent banking stress would slow the economy. “The U.S. banking system is sound and resilient,” the statement read.

If the Fed does put further rate increases on hold, will they also stop their quantitative tightening? The chart below from the Federal Reserve shows how the Fed’s balance sheet has grown since the 2008 financial crisis. You can also see the solid blue line just beginning to drop as the Fed started selling part of the $8.3 trillion portfolio in 2022. The dotted blue line represents the projected course the Fed was planning to take. However, now with uncertainty over the global banking situation, further sales from the central bank’s portfolio may be in doubt.

If you have any questions, please contact me.

The Markets and Economy

• Sales of previously owned homes, which make up most of the housing market, rose 14.5% in February from January. However, sales were down 22.6% from a year earlier. Last year at this time, the Fed was just starting its policy of increasing interest rates.

• S. regulators clawed back money celebrities earned while promoting cryptocurrencies. Actress Lindsay Lohan and boxer Jake Paul agreed to pay a combined $400,000 to settle with the Securities and Exchange Commission. Famous people who touted digital assets were in violation of investor-protection laws according to regulators.

• According to a recent survey by Fidelity Investments, Americans have only 78% of the projected savings needed to cover their retirement spending needs. That figure is down from 83% in 2020. Millennials saw the biggest drop in retirement preparedness over the same time period, despite rising income.

• The Bank of England raised its key interest rate by 0.25% last Thursday. The announcement came the day after the Fed raised rates by 0.25% and signifies policy makers around the world continue to fight inflation.

• More than a million people took to the streets across France last week as workers protested President Macron’s raising of the retirement age from 62 to 64. Macron has said with longer life expectancies, the financial strain on the government’s budget is not sustainable. Workers believe higher taxes are needed to keep the generous benefits in place.

• Freight companies are dialing back expectations that demand will rebound in the second half of the year. S. retailers are growing more cautious amid a higher interest rate environment.

• An overwhelming share of Americans aren’t confident their children’s lives will be better than their own according to a Wall Street Journal-NORC poll. Turmoil in the financial markets as well as increasing healthcare and housing costs were cited as main reasons for the results.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.

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Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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