March 17, 2023
“It’s tough to make predictions, especially about the future.” – Yogi Berra
Most mornings as I’m having my coffee, after a devotional and quiet time, I look at my CNBC app to check pre-market trading and the major headlines for the financial markets. For the early morning of March 17, here is the top story:
“Futures are down but overall the market is headed for a winning week after several major banks stepped in to bolster (a major west coast regional bank in the headlines). The Dow is up 1.06% for the week while the S&P 500 is up 2.56% – on pace for its best weekly performance since January. The Nasdaq is up 5.19%, on track for it’s best week since November.” – CNBC story March 17, 2023 6:58am
When the week started with the second and third biggest bank failures in U.S. history, I’m not sure I would have guessed “winning week” for financial news headlines, yet that’s where we stand. Overall, as we head into Friday morning more than just stocks had a good week (through 3/16):
- Bonds were up about 2% on the week (Bloomberg Aggregate Bond Index) as the rate on the closely-followed 10-year Treasury moved from 3.9% on March 10 down to 3.4% on 3/17.
- A popular ETF tracking gold was up close to 5% in the last week.
- Junk bond performance was positive (up about +0.5%) as the impact of lower interest rates offset a minor increase in credit spreads.
One of the things we talk about at TJG, and especially this week, is placing logic above emotions (both fear and greed) when market stress is high. Joe Wiggins of Behavioural Investment shared some great nuggets yesterday:
“The key danger for investors during periods of market stress is the contraction of our time horizons. Even if we have a long-term orientation, we quickly start to worry about the immediate future. All our carefully considered behavioural plans can be torn asunder, as we seek to remove the anxiety we are feeling right now.”
“Never is the most damaging investor urge of ‘something is happening in markets; we must do something to our portfolio’ more powerful than during a concerning and unexpected market event. It feels like everything is changing, so our investments must also change. We never let our failure to predict what has just happened stop us predicting what will happen next.”
In addition to the Behavioural (that’s the European spelling), here are a few other points we have been talking about at TJG:
- The scene of the accident is often NOT where we see future leadership. We’ve had lots of questions along the lines of, “should we buy regional banks?” Banks definitely hit two key criteria we like to see for a “fat pitch” – they are cheaper and there is fear – but we are not sure they are leadership going forward. Government actions to provide a liquidity backstop have been well received, but banks continuing to do business is a different thing from banks having a strong equity position. Tightening lending standards, higher government assessments to cover insurance, and keeping more liquid capital could all weigh on bank profitability in the months ahead.
- Where is leadership? A question we keep asking is where are we seeing strength in the markets? I’ve noted on days when an fund consisting of a basket of regional banks is up, a fund consisting of a basket of semiconductor (computer chip) stocks is up even more. So far in 2023, stocks in the technology and communication services sectors have been leadership and that trend has generally continued this week in the midst of all of the bank headlines. It’s also interesting to note the worst performing sector so far in 2023 is energy. And, in the last five days, the worst performing sector has still been energy. Recent relative leadership has persisted despite the banking headlines.
- How should clients think about their concentrated stock positions? Some of the more challenging conversations I have had this week have been with clients where we have the privilege of managing most of their portfolio, but they may have a long-time position outside of their managed portfolio in a favorite regional bank stock which they have owned for years, but has gotten beaten up in the fallout of the two recent banking failures. Those conversations have been a wonderful opportunity to discuss the purpose and timeframes behind the various parts of their portfolio. Specifically, it’s been an opportunity to discuss the four key building blocks – money which is meant to:
- Protect – safe, liquid, is easily accessible
- Provide – provide cash flow to sustain current lifestyle and expenses
- Grow – risk managed growth toward tangible goals
- Aspire – have an emotional connection or move toward undefined long-term goals
We believe when investors understand the purpose behind various parts of their portfolio and the assets and purpose are aligned with their plan, it can be emotionally freeing in times of market stress. In this case, an individual bank stock shouldn’t be a “Protect” or even a “Provide” cash flow asset even though it pays dividends. It probably makes sense to think of the stock as an “Aspirational” asset which can provide upside in good times, but isn’t going to jeopardize a successful long-term financial plan if things get rough.
Unexpected market events are anxiety producing and can make us want to act in ways which may be counterproductive over the long-term. Again, quoting Behavioural Investment, “it is not just that our time horizons contract, but our focus narrows. The attention of virtually all investors turns to one thing, typically at the expense of issues far more important to our long-term fortunes.” The bank failures and the resulting ripple effects cannot be minimized. That said, this is a time where we need to seek logic over emotion (fear or greed) and take a broad view, using planning and portfolios as tools to maximize opportunities for our clients within the continued uncertainty (in both directions!) ahead.
Written by Travis Upton, Partner, CEO and Chief Investment Officer