Until about 2 weeks ago, I did not know that Silicon Valley Bank existed. Today, it is in the headlines every day and culminated with the announcement this morning that it has filed for Chapter 11 bankruptcy protection. The market has been volatile, particularly the financial sector, with the concern that this could be an event that sparks a financial crisis similar to 2008. Credit Suisse, a large Swiss bank, is also rumoured to be having some difficulty. I’d like to share with you what I make of all this.

The collapse of Silicon Valley Bank, while serious and concerning, does not seem likely to cause another financial crisis similar to what we experienced in 2008. For one thing, financial institutions today have far better balance sheets and less leverage than they did during the Great Financial Crisis. Secondly, this event seems to be relatively isolated compared to 2008 and 2009 when approximately 500 US banks ended up failing. 

So this is unambiguously bad news. A US bank has failed, regulators have been forced to step in, and it is causing uncertainty just about everywhere in the market. But is there a silver lining in all of this?

I think there are several positive aspects to this. First and foremost, this is not unprecedented. Businesses, including banks, occasionally fail. The market will adjust and move on. Secondly, while the market is not cheap necessarily, any froth that existed has largely been taken out (such as in technology). There are pockets of real value that I am very bullish on. 

The real silver lining here, though, is how the Federal Reserve handles this at their meeting next week. The market seemed settled before all this happened that rates were going to go up another 0.5%. I think there is a possibility that they either announce they have stopped raising rates or that this is the last rate hike. They will likely not say that it is because of the turmoil in the financial sector but it has to be something they are considering. If they go this route, we could see a relief rally in both the stock and bond markets.

We also need to be prepared, though, for them to continue to be aggressive. If they don’t use language that indicates they are done raising rates, the volatility could continue. Either way, I see this as yet another buying opportunity and will try to take advantage as best I can.

 

As always, if you have any questions, please don’t hesitate to reach out.