Financial markets, particularly the stock market, over the short term can be like watching a novel teenage romance. So much drama, occasionally eliciting both elation and weeping in the same darned day. Trying to be an adult in the room, or an investor, can sometimes be just exhausting.
For the parent with a first time 15-year-old in this era of phone tracking and social media, the ups and downs of the first boyfriend or girlfriend can be a minefield. As a rodeo horse, I am not a first timer. My hard learned Dad lesson: Very rarely is the object of affection a true villain, or a true hero. It’s best to sit out the short-term emotional swings and even occasional breakups in supportive silence, while keeping an intuitive, protective eye on the overall health of the child just in case the relationship becomes truly unhealthy and requires parental intervention. Which thankfully, in my parenting life, has been extremely rare.
It’s remarkable how this same emotional discipline can be applicable to investing. Like teenagers in love, the behavior of the stock market in my experience is comprised of a series of short-term compulsions. Interest rates, earnings, jobs and dozens of other data points create a never-ending stream of potential commotion for the longer-term investor. Like social media and phone tracking for teenagers, the 24-hour news and information cycle being blasted onto the screens we carry in our pockets makes it almost impossible to disconnect. What have we gotten ourselves into?
Forced to pay attention we are, however, because like the dad of a teenager in love, the possibility of true risk is sometimes buried in the day-to-day gyrations and news cycle, and right now my spider senses are starting to tingle (Gen-X super hero reference, Google it) about what the market is telling us about the regional banking sector.
I wrote about this topic a few weeks ago, when the first domino, which we hoped was the last, fell with Silicon Valley Bank. Due to the unique business model of this bank, it was easy to dismiss the crisis as particular to this bank. The bank had strange priorities and managed its portfolio risk poorly. Sure, it was followed by the collapse of Credit Suisse, but I wouldn’t have touched that bank with a 10-foot pole since the '08 financial crisis, so the reaction from the market was unexpectedly muted. In both scenarios no money ended up being lost as governments came in with implied deposit insurance. Then, down went Signature Bank, which hit closer to home. Once again, no money was lost to depositors and the stock market, which was focused on a different obsession at the time, rallied through the crisis, in a way relegating these higher profile capitulations into the realm of background noise.
This week, however, the burning embers of this regional bank crisis began to spread. I’m not going to say we have full blown wildfire at this point, but I’m also not sure the burn lines are going to hold either. The week started on Sunday with the shot-gun adoption of First Republic Bank by behemoth JP Morgan, then later in the week the crisis spread throughout the sector with bank stock after bank stock getting crushed. The contagion looks to be heading into full swing.
The potential moral hazard presented by this moment is extremely concerning. In response to Silicon Valley and Signature Bank, the government reassured markets with an implied deposit guarantee over all deposits in these banks. The key word here is "implied," a few weeks later Treasury Secretary Yellen went on record saying the FDIC was not considering formally expanding its deposit insurance program. Investors seem to be begging for a test of this the government’s previous implications. With the takeover of First Republic bank, the JP Morgan takeover card has been played as well, and I’m anxious we may soon find out if the government has any more cards to play in its hand.
While the causes and players are different this time, my 2008 Déjà vu is starting to percolate. With the regional bank crisis seemingly gaining steam, while the federal government is notably distracted with the debt ceiling debate, I think it may be time to take a hard look at the health of our volatile stock market child. Occasionally the stress being projected by short term volatility is legitimate, it’s possible we are in the early stages of something unhealthy which may require some adult decision making.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
