North American Stock Markets have moved in both directions in the wake of current Banking failures in the US. However, in spite of the fears of a 2008 style financial crisis those same markets are, on balance, higher today than before Silicon Valley Bank went under. My feeling is that the weakness in Banking is a symptom of the massive interest rate hikes by the Federal Reserve over the last year. Stock Markets are betting that these interest rate hikes may be at or near a peak for this economic cycle. Central Banks may be inclined to consider that the lagging effect of higher rates could be much more deflationary than they thought just 2 weeks ago.

Silicon Valley Bank did not fail due to any malfeasance but due to a classic banking error of investing long term and lending short term at a time when most people could intuit that rates were likely to rise. Rise they did at breath taking speed and SVB found themselves earning 2% on US 30 yr Treasury Bonds but having to pay 4.5-5% on customer deposits.

Credit Suisse was forced into a Shot Gun Wedding with UBS by their Regulators and First Republic Bank required huge capital injections from the larger Money Centre Banks like JP Morgan, Morgan Stanley and Bank America.

Is this another 2008 style Financial Crisis? Not at all. The North American Economies are strong. Unemployment is still near all time lows. Bank Balance Sheets and Capital levels in the US are far stronger than they were in 2008. Interest rates while higher than a year ago are not high in a historical context.

I have been saying since January that Central Banks need to pause at some point to observe what impact their rate tightening actions have had on the economy. I would think the Banking failures of the last 2 weeks have focused the Central Banker’s attention. The US
Federal Reserve raised rates another 25 basis points on March 22 as expected. I believe a pause in rate tightening is coming.

This would present a much more favourable environment for owning stock in excellent quality North American companies.

PBO expects Bank of Canada to hold rates for remainder of year