For months now, market participants mainly have been focused on the Fed, interest rates, inflation and the pace of economic growth. Those were the issues that were supposed to determine where the market was headed next.
However, in bear markets, the snake that bites you is always the one you don't see. The market was caught by surprise on Thursday when SVB Financial Group (SIVB) , the holding company for Silicon Valley Bank, which is the 16th largest bank in the US with around $200 billion in assets, saw its stock drop 70% on Wednesday and is down another 40% in premarket trading here on Friday morning.
The catalyst for the steep drop was that SIVB ran into a liquidity problem and was forced to liquidate bonds that it originally intended to hold until they matured. This sudden recognition of a nearly $2 billion loss caused some big venture capital firms to pull their deposits out of SVB and made the liquidity problem even worse.
Other banks sold off in sympathy as the market struggled to figure out if there would be other situations where banks would be forced to sell bonds that they originally intended to hold until maturity.
While there have been ongoing issues with financial institutions that are leveraged to Bitcoin and cryptos, there has not been any real spillover to the big, traditional banks such as JPMorgan Chase (JPM) and Citigroup (C) . However, Charles Schwab (SCHW) suffered a 13% loss Thursday and the entire financial sector was down more than 4%
SVB's problems shifted the focus away from the Fed and had the ironic impact of decreasing the likelihood of a 50-basis-point rate hike at the next Fed meeting due to the broader financial uncertainty that suddenly appeared. Fed members will be cautious about exacerbating a problem they helped to create by aggressively raising interest rates.
Although the market is now focused on this new problem, the inflation issue is not going away, and there is the February jobs news this morning that is going to have an impact on what the Fed does next. The market and the Fed are still awaiting the Consumer Price Index and Producer Price Index reports next week, but this information now must be considered in the context of unusual pressure on banks.
The sudden development of a new problem that was not anticipated is typical of bear markets. There are always unintended consequences to fiscal policy, and the run on SIVB is one of them. The question now is whether this situation will develop into a contagion that will spill over to other financial institutions that are holding bond portfolios that have large unrealized losses.
Market conditions are extremely nervous here on Friday morning as folks try to sort out the impact of this sudden development. There is also tremendous economic uncertainty as we await more economic news and clues as to what the Fed will do next.
Technical conditions are extremely poor, and there is little nearby support for the major indexes. I plan to maintain high cash levels and be patient with any buying.
