Bank failures rattle U.S. markets.
Fed steps in to calm investors.
Over the last few days, markets have been jostled by the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank. The failure of two sizeable financial institutions within 72 hours has raised eyebrows amid an otherwise resilient economy. By most measures, the U.S. economy continues to hum. Jobless claims are low, consumers have pent up savings, and consumer spending is healthy. There have been pockets of weakness, but the economy has performed much better than anticipated in 2023. The Fed’s biggest challenge has been trying to slow the economy enough to lower inflation.
The failures of SVB and Signature add a new wrinkle. For a decade, SVB has been a key source of capital behind the boom in technology startups. However, the sharp rise in interest rates over the past 12 months slowed investment in tech start-ups and began to quickly drain the bank’s deposits. Following several failed attempts at raising capital and a hysteria-induced bank run, regulators at the FDIC seized control of the bank on Friday afternoon. As depositor concern spread, Signature Bank met the same fate two days later. It is worth noting that these banks are uniquely concentrated in the tech-focused venture capital and cryptocurrency communities.
To stem the flow of deposits from similar regional banks around the country, the FDIC, Federal Reserve, and Treasury Department took swift action to shore up confidence in the banking system. The FDIC announced that all SVB and Signature depositors would be made whole from the Deposit Insurance Fund. In addition, the Federal Reserve announced a new Bank Term Funding Program to safeguard institutions vulnerable to the market instability created by the SVB. The U.S. Treasury is providing $25 billion to backstop the program, essentially creating a government-backed guarantee that depositor funds are secure. These actions have calmed the broader market, but regional banks and other deposit-gathering institutions remain under pressure.
Investors with DCM have little direct exposure to this space. We believe the banks and financial institutions we hold in client portfolios are highly diversified and well-positioned to endure hardships in the broader banking sector.
It is too early to say how much of a ripple effect these events will have. Our focus remains on owning companies with solid balance sheets and actionable long-term growth strategies. Over time, companies trade on their own merits, and those with a path to sustainable and predictable dividend growth continue to look attractive. We will continue to monitor this fluid situation to ensure there isn’t spillover into other parts of the market and economy.
As always, we’re happy to answer any questions you may have regarding this situation. Give us a call at (812) 421-3200 or email us at email@example.com if you need help navigating these murky waters.
Kyle Markle & DCM Investment Policy Committee
20 NW First Street, Fifth Floor | Evansville, IN 47708 | 812.421.3200
This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.
S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.