Week of March 13, 2023
All three major indexes finished negative last week with the Dow and S&P 500 dropping 4.43% and 4.55%, respectively. Due to fears of continued aggressive action from the Federal Reserve (Fed), the tech-heavy Nasdaq declined 4.71%. In his annual testimony before Congress, Fed Chair Jerome Powell was quite hawkish and clear - interest rates could go higher than previously anticipated and last longer if inflation does not show signs of slowing down. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” stated Powell. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he continued. Investors will be closely watching Tuesday’s Consumer Price Index (CPI) report for hopeful signs that inflation is cooling.
Another strong jobs report released Friday fueled investor’s concerns of more aggressive Fed action on the horizon. Last month’s gain of 311,000 jobs was less than the 500,000 jobs added in January but was still above economists’ estimates. Some experts fear that a strong labor market will give the Fed reason to continue its aggressive rate hiking campaign.
Headlines on Friday focused on bank regulators seizing control of Silicon Valley Bank (SVB). SVB’s collapse stems from the Federal Reserve’s aggressive rate hiking campaign. Bonds currently on the bank’s balance sheet yielded very low coupon rates – so when these were sold, they were sold at a deep discount leading to a $1.8 billion loss. This led to widespread fear of insolvency and caused bank clients to withdraw $42 billion by the end of business on Thursday. This left SVB with a negative cash balance of $958 million – which led to prominent venture capital funds instructing clients to pull their funds on concerns of a bank run.