March turned out to be a decent month in markets. Large cap equities in the US and abroad rose, however small US stocks fell. In the fixed income markets, interest rates for governments fell. In capital markets, investment grade and high yield issuers benefited from base rates falling, but that benefit was offset some by an uptick in credit spreads widening.
Change can happen fast in markets. The precipitous collapse of Silicon Valley Bank triggered a crisis in regional banks and an emergency response from the Fed, FDIC, and US treasury. The acute problem was that banks with a large percentage of uninsured deposits had mismanaged their interest rate risk, leaving those banks vulnerable to runs. As we write this, that crisis seems to be in the process of stabilizing. However, the crisis highlighted a broader issue in the banking system. The cost of funding is rising and offsetting interest income on the assets banks already have on the books. To frame it in terms of bank health, the illness seems to be moving from something acute in nature to a more chronic state. This set-up looks similar in nature to the savings and loan issues from a generation ago.
As all these issues were identified and digested by the market, expectations for future Fed interest rate policy gyrated wildly. While we think it is wise to take the Fed at their word, March was a reminder that change can happen fast and unexpectedly.
