Market Update: March 10, 2023

The market is under a bit more pressure this week and has broken through key support levels around 3900 for the S&P. The next key level of support is around 3780 on the S&P. But the market is clearly not ready to take on more risk at this point and may continue to bounce around in the near term.

The big news item of the week is weakness around Silicon Valley Bank or SVB for short. On Wednesday March 8, the bank took a $1.8b loss on investment sales to cover large deposit outflows from their reserves. The stock subsequently plummeted 60% in a single day and kicked off further selling overnight Thursday when they announced plans to issue common and preferred stock to shore up cash positions. They have since scrapped those plans and are currently seeking a buyer. News is rapidly changing regarding this bank so by the time this video comes out, the situation could potentially be completely different.

But here is where things stand currently. This bank has been under significant pressure since late 2021. Most of this bank’s customers are the typical tech startup out of Silicon Valley. Because 2022 put a lot of pressure on venture capital and tech startups, withdrawals from this bank have been more pronounced than usual. Ultimately this resulted in one massive sell off a couple of days ago.

As a reminder for how banks work, when you make a $1000 deposit into a bank, only a portion of that deposit is kept as cash. The typical bank may elect to keep a 10% minimum cash level where $100 is kept as cash and $900 is used to buy investments. It’s these investments that generate profits for the banks. This system works under most conditions until there is a large withdrawal that exceeds cash positions. In this case, a $200 withdrawal would force the bank to sell $180 worth of investments to maintain the 10% cash level. In SVB’s case, these sales were at a loss which clearly harms profitability. When the market value of the investments fall below the deposit liabilities from the banks customers and the customers subsequently withdraw their deposits, that’s when the bank fails. This is a distinct possibility for SVB if they cannot find a buyer.

Here’s why this matters for the rest of the banking industry. The reason why customers are withdrawing funds from the bank is because there are better options available that earn a higher interest rate. Currently, Treasury Bills earn about 5% which definitely exceeds the typical savings account, depending on where you bank. This is currently spurring a small bank run that many banks here in the US are currently dealing with. They either have to be able to withstand withdrawals or they have to increase interest rates. Odds are, they’ll choose the latter. But this will certainly hurt profitability. Which is why we’re seeing fairly wide spread selling in financials this week.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved March 10, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). SIVB (Interactive Charts). Retrieved March 10, 2023, from FactSet Database.

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