As of 14 March 2023
In a matter of days, the cumulative effect of US Federal Reserve (Fed) policy tightening has hit the US banking sector hard, beginning with the collapse of Silicon Valley Bank (SVB) on March 10.
Panicked depositors in several banks have since rushed to the exits, setting off a liquidity crisis and leaving some banks’ capital positions in precarious shape. The Fed and the US Treasury have taken swift steps to help stabilize the banking system by providing liquidity and assuring impacted depositors that they will be “made whole.” This past weekend, they unveiled several new facilities designed to ease the "liquidity crunch" and to prevent further bank runs.
However, growing investor concerns are sweeping the financial markets: Safe-haven assets have benefited, Fed rate-hike expectations have been all but extinguished, government bond yields are lower and credit spreads wider, and the US dollar (USD) has risen. Meanwhile, global equities are down, with small-cap stocks the big laggards so far.
The situation is evolving rapidly as we speak, as are the potential economic and market implications. At Wellington, we don’t always agree with each other, but we vigorously debate the issues and ramifications. Here are some key points from our latest internal discussions, highlighted by a common theme that there is now a greater probability of a US recession in the near term. Many of us also think investors should consider pivoting to a “risk-management mode” that favors higher-quality assets.