Stocks sold off on Friday after shocked investors learned of SVB Financials rapid shutdown. The move by the US Treasury left investors wondering about contagion beyond the banking sector.
Let’s do the time warp again. Are you shaking your head thinking “what a mess?” If so, you’re not alone. After last year’s stock market performance, it was not a leap to be thinking back to the dotcom bubble days. All our favorite go-to stocks, mostly technology, were all behaving… um, abnormally. For many years, any dips in those stocks became buying opportunities, despite historically large valuations. It was OK, because those companies were healthy and were able to continue their growth trajectories, validating their large valuations with future growth prospects. Some pundits were calling the abnormally large valuations a bubble. Uh, oh there it goes, the ”B”-word, as in the Dotcom Bubble. We all know what happens to bubbles, don’t we. Stocks posted 3 consecutive years of losses from 2000 through 2002. What a mess. Now, 2021 was not quite like the popping of the Dotcom Bubble as the decline of growth stocks last year was largely driven by the Fed’s aggressive rate hiking. Wait, does that remind us of something from our past?
It sure does. I am confident that some of my readers remember the 1980s financial markets. Bond yields were crazy-high… so were mortgage rates… and inflation. The stock market did reasonably well during that period, climbing every year except for one during the decade. Toward the end of the 1980’s, you may remember The S&L Crisis. Do you? The FSLIC closed some 296 thrifts (Savings and Loan Banks) from 1986 – 1989 alone. Many more would be shuttered in the few years that followed. One of the key drivers for the crisis was the high short-term interest rates caused by aggressive Fed monetary tightening. The banks’ inability to exact healthy net interest margins on lending caused stress which exposed other, more devastating weaknesses in the thrifts. Yes, there was imprudent lending on overvalued real estate, but there was also fraud. It was not a good time to be a banker, for sure. What a mess.
How can we forget The Global Financial Crisis, which gripped… well, the globe. That came in the early fall of 2008 when the FHFA (Federal Housing Finance Agency) put Fannie May and Freddie Mac into conservatorship, essentially taking over the two government agencies to backstop a larger financial crisis that would result from poor lending habits in sub-prime mortgages and declining real estate valuations. Come on, now you remember. That kicked off all sorts of trouble in financial markets around the globe. The most notable result of The GFC was the collapse of Lehman Brothers. But there were plenty of other companies that simply disappeared, many of them gobbled up for pennies on the dollar by larger institutions. I won’t even bring up stock market behavior through that crisis, nor will I bring up The Great Recession, which was accentuated by the events. What a mess.
So here we are, on a Monday morning after the Friday on which we learned that SVB Financial was shut down by the feds in what was the 2nd largest bank failure in history. Over the weekend, New York State authorities shut down Signature Bank. The good news, if you could call it that, is that Federal authorities acted quickly, backing all deposits in both of the banks. For shareholders, the news may not be so good, but will become clearer in the days ahead as the FDIC will seek buyers for the now defunct institutions. This is not a note on why these bank’s failed or what the larger implications may be, those will all come in the days ahead. We start this week shaking our heads thinking “what a mess,” as we feel that we are stuck in some sort of time warp that has us somewhere between The S&L Crisis, The Dotcom Bubble, and The Global Financial Crisis. There is optimism, however, given our past experiences, that this will not escalate into… well, another crisis for the record books.
WHAT’S SHAKIN’
First Republic Bank (FRC) shares are lower by -54.72% in the premarket in the wake of SVB’s failures. Investors are concerned about similar fates for banks with comparable, albeit smaller exposures. First Republic announced over the weekend that it secured significant liquidity from the Treasury and JP Morgan chase in order to avoid any problems. The news may have calmed depositors, but investors, not so much. Dividend yield: 1.32%. Potential average analyst target upside: +74.2%. WHY IS THIS SO HIGH considering the company’s situation? This number is simply the difference between the stock’s price and the average 12-month price targets of Wall Street analysts. It is in no way a recommendation and it does not mean that the stock will actually achieve the targets. Analysts are likely to revise their targets in response to current events.
Newmont Corp (NEM) shares are higher by +2.68% in the premarket as investors seek safe haven investment in gold and gold mining in the wake of last week’s SVB Financial failure. Dividend yield: 1.32%. Potential average analyst target upside: +33.1%.
FRIDAY’S MARKETS
Stocks sold off on Friday in the wake of Silicon Valley Bank’s being shut down by Federal authorities. The S&P500 fell by -1.45%, the Dow Jones Industrial Average traded lower by -1.07%, the Nasdaq Composite Index dropped by -1.76%, and the Russell 2000 Index declined by -2.95%. Bonds climbed and 10-year Treasury Note Yields dropped by -20 basis points to 3.69%. Cryptos slipped by -0.52% and Bitcoin declined by -0.61%.
NEXT UP