Investment Strategy
1 minute read
State of the Union: How are things progressing?
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The world feels a lot different than it did a year ago.
Last week back in March 2023, the near-simultaneous collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank shook confidence in the banking system. Many feared a recession was inevitable. Some predicted a stock market crash akin to the Global Financial Crisis.
Yet, the policy response was swift and meaningful. In a short-time, recession obsession faded as the economy proved resilient, and stocks marched onto new all-time highs.
But that doesn’t mean the landscape is without scars: More than three-fourths of U.S. regional banks’ share prices are lower than before the stress began. And while investors no longer fear bank runs, encumbered commercial real estate (CRE) remains a concern. Bank profitability is still under pressure amid high rates, emergency-era lending is coming to a close, and regulation is just getting started.
This week’s Top Market Takeaways unpacks what’s changed over the last year, what’s stayed the same, and what could be ahead. Through risks and market swings, we remain constructive on the path ahead.
Tighter credit conditions are still a risk we’re monitoring. But while interest costs are higher and now take up a larger share of corporate and consumer income compared to the past, balance sheets and cash flows remain healthy overall. Some interest rate sensitive sectors, like housing and manufacturing, are even seeing some signs of green shoots.
As the drama unfolded, swift and coordinated action by the FDIC, Fed, Treasury, and even a consortium of U.S. banks did much to offer liquidity, reassure bank depositors, and still calm. As part of that, the Fed created a historic Bank Term Funding Program to provide emergency support. Now, in a sign of the more stable times, that program ended (as expected) last week. As we now move beyond the band-aid fixes, that poses the question: what is the long-term solution for banking sector stability?
Regulators are working to bolster the health of the banking system. The Fed and others are tightening their grip on capital requirements for banks through the likes of Basel III Endgame and other measures that increase the need for short-term liquidity. That signals that steps are being made in the right direction, but the balance between security and industry concerns is still a work in progress. Chair Powell signalled last week that the central bank is even considering a “broad” overhaul of its initial capital requirement proposals.
That said, it’s worth noting one learning from the latest Q4 earnings season: The biggest, systemically important banks still signposted strong capitalization. That’s a good sign that large banks have a good buffer ahead of potential regulatory changes or even the risk of an economic slowdown.
In the end, staying invested prevailed over the last year. It’s also worth noting last week marks the four-year anniversary of the start of the COVID drawdown, when the S&P 500 fell almost 10% in a single day. As an unexpected pandemic gripped the globe, it would have felt really tempting to hit “sell.” But if you’d held onto your investment, it would have grown over +120% from that day until now.
Time makes a lot of difference. As we look forward and purvey the current landscape, we see a host attractive investment choices across asset classes. We believe stocks can continue to make new highs, and bonds are now in a different regime. And as much as tighter credit and stress is a risk, it can also create opportunity for investors. For instance, private lenders can collect a premium for providing capital, and stress-focused managers can take advantage of mispriced assets and loans in areas like commercial real estate.
As with the past year, investors should rely on steady hands to guide their long-term portfolios, and focus on investments that can protect and grow their wealth over time. Your J.P. Morgan team is here to discuss what portfolio options work best for you and your family.
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