WEEKLY INSIGHTS

March 11, 2024
Download PDF
Important Disclosures

Key Takeaways:

  • Quits rate falls to lowest level since August 2020.
  • Fed’s Beige Book shows consumers more sensitive to prices.
  • S. economy adds more jobs than expected.
  • Large-cap growth leads U.S. equities lower.
  • Yields retreat as investors digest employment data.
  • Natural gas prices surge, leading commodity gains.

Weekly Economic Recap — Job Growth Remains Robust

The ISM Services Index decreased slightly in February but remained in expansion territory (a reading above 50) for the 14th consecutive month. The employment component dipped back into contraction territory (a reading below 50). However, new orders and broad-based business activity rose.

U.S. job openings as reported by the JOLTS report were higher than consensus estimates in January (8.86 million vs. 8.85 million est.) as employers still have strong demand for workers. The current ratio of openings to unemployed held steady around 1.4:1. Those leaving their jobs volunarily (i.e., quits rate) fell to the lowest level since August 2020.

The Fed released their Beige Book, which indicated the U.S. economy continued to expand at a modest pace since earlier in the year, but consumers are starting to become “increasingly sensitive to price changes.” Districts reported labor markets continuing to ease amid improvements in labor availability and employee retention.

The U.S. trade deficit widened by the most since April as the value of imports increased to the highest level in a year. Capital goods and motor vehicle prices on the imports side contributed the most to the rise.

The U.S. economy added more jobs than expected (275K vs. 200K est.) in February. However, the unemployment rate rose (to 3.9%) to the highest level since January 2022 as more people entered the labor force.

Average hourly earnings increased less than expected (0.1% vs. 0.3% est.) in February, while the YoY change decreased slightly to 4.3% (from 4.5%).

Weekly Market Recap — U.S. Markets Underperform as Large-Cap Growth Trade Stalls

Equities: The MSCI AC World Index was higher for the seventh straight week driven by international equity markets, which broadly outperformed U.S. markets. The rally in technology stocks stalled which sent the S&P 500 and Russell 1000 Growth lower for the week. Europe and Japan led the gains in the developed international space.

Fixed Income: The Bloomberg Barclays Aggregate Index was higher for the third straight week as Treasury yields fell as investors digested employment data in the U.S. All areas of fixed income markets were higher for the week driven by investment grade corporates and emerging market bonds.

Commodities/FX: The Bloomberg Commodity Index was higher for the second straight week. Natural gas prices surged by the most since October as production cuts took place amid warmer temperatures. Gold prices were higher for the third straight week as investors weigh the likelihood of Fed rate cuts.

Key Takeaways:

  • One year since collapse of Silicon Valley Bank (SVB).
  • Regional banks have still not recovered deposit base.
  • Lending standards remain tight.
  • Commercial real estate risk major concern.
  • Run on banks are unpredictable and even harder to control.

Theme of the Week — Regional Banking Sector One Year After SVB Collapse

On March 10, 2023, Silicon Valley Bank (SVB) became the second-largest bank failure in U.S. history (behind Washington Mutual in 2008). Its collapse crippled the regional banking sector, and we quickly witnessed the downfall of two more banks (i.e. Signature Bank two days later and First Republic in May 2023).

Just to recap, SVB’s failure was attributed to several factors. The Fed’s aggressive tightening cycle resulted in the value of the risk free Treasuries that SVB held to substantially decline. Second, SVB was a major bank for tech start-ups. In 2022, the tech sector struggled due to high interest and inflation rates. As these companies continued to tap SVB for deposits, the bank was forced to sell their depressed Treasuries to meet withdrawals. This put the bank’s balance sheet into question, a run on the bank occurred and ultimately the bank failed. This spread to other regional banks, and in total, five banks failed in 2023, amounting to nearly $550 billion of assets, the largest ever in American history. In this weekly, we dive deeper into the current state of the regional banking system after a tumultuous year and why we can not say the regional banks are out of the woods.

  • Current state of the regional banking system: Since SVB’s collapse the S&P 500 Regional Banking Index has underperformed the larger S&P 500 Diversified Bank Index by over 3000 From the time SVB collapsed to the end of March 2023, small banks in the U.S. lost ~$220 billion worth of deposits. They have not recovered that base with deposits still below pre-SVB levels. Banks (both small and large) have been forced to tighten lending standards due to concerns over their balance sheets. While there has been some easing in recent months, lending conditions remain tighter than the historical average.
  • Regional banks may not be out of the woods: Aside from rising interest rates and less lending ability, small and regional banks still face the crisis in the commercial real estate market. According to a report by the National Bureau of Economic Research, the decline in commercial real estate values may result in “$80 to $160 billion in bank losses” and put anywhere “from dozens to more than 300 regional banks at risk of failing.”1 Last week we saw a consortium of investors rescue New York Community Bank after its shares dropped over 70% and got downgraded to junk status. Its exposure to commercial and residential real estate led to its demise. In addition, according to Morgan Stanley, there is ~$1.5 trillion worth of commercial real estate debt that needs to be refinanced before the end of 2025.

1https://www.nerdwallet.com/article/banking/svb-collapse-one-year-ago

2https://www.axios.com/2024/01/09/office-vacancy-rates-record-remote-work-cre

The Bottom Line

We believe the biggest risk to regional banks is in their exposure to commercial real estate debt. The enormous amount of debt that needs to be refinanced will need to be refinanced at higher rates. It will also need to be refinanced in a fundamentally weak environment. At the end of 4Q23 U.S. office vacancy rates hit a record high (~20%), surpassing some of the weakest times in commercial real estate’s history (1986 and 1991).2 Unfortunately banks, due to the nature of their business (deposits are their lifeline), can see their solvency evaporate in a matter of days when negative news sparks a run on the bank. It is nearly impossible to predict and even harder to control. We think we could see more consolidation/mergers in this space as we work our way through the enormous amount of debt that needs to be refinanced.

Disclaimer: © 2024 Authored by Megan Horneman, Chief Investment Officer, Verdence Capital Advisors, LLC

Reproduction without permission is not permitted. The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index.  This material was prepared by Verdence Capital Advisors, LLC (“VCA” or “we”, “our”, “us”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice. Past performance is not a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Alternative investments are designed only for sophisticated investors who are able to bear the risk of the loss of their entire investment. Investing in alternative investments should be viewed as illiquid and generally not readily marketable or transferable. Investors should be prepared to bear the financial risks of investing in an alternative investment for an indefinite period of time. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Sector Watch Use of this website is intended for U.S. residents only. Any recommendation, opinion or advice regarding securities or markets contained in such material does not reflect the views of Verdence Capital, and Verdence Capital does not verify any information included in such material. Verdence Capital assumes no responsibility for any fact, recommendation, opinion, or advice contained in any such research material and expressly disclaims any responsibility for any decisions or for the suitability of any security or transaction based on it. Any decisions you may make to buy, sell, or hold a security based on this research will be entirely your own and not in any way deemed to be endorsed or influenced by or attributed to Verdence Capital. It is understood that, without exception, any order based on such research that is placed for execution is and will be treated as an UNRECOMMENDED AND UNSOLICITED ORDER. Further, Verdence Capital assumes no responsibility for the accuracy, completeness, or timeliness of any such research or for updating such research, which is subject to change without notice at any time. Verdence Capital does not provide tax, or legal advice. Under no circumstance is the information contained within this research to be used or considered as an offer to sell or a solicitation of an offer to buy any particular investment/security. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk. Commodity‐related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity‐related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Data is provided for information purposes only and is not intended for trading purposes. Verdence Capital shall not be liable for any errors or delay in the content, or for any action taken in reliance on any content. Weekly Insights/Qtrly & Annual Outlook The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index. Semi-Annual Chart Pack Where shown, performance information presented is that which has been calculated and presented by an unaffiliated third-party manager. We have no insight into the performance of the advisor/product/account or fund shown and do not attempt to determine whether the performance presented is accurate. Therefore, the performance could be incorrect, overstated or not reflective of actual trading of client funds. There is the potential that the performance shown is a back test and not the result of real investment advice and trading. As such, it could not be relied upon as indicative of future returns of a particular strategy. Where performance shown is that of a pooled account, limited partnership, or private equity fund, you should be aware that there is a significant lack of transparency into the operations and investment process and investment vehicles invested in. As a result, pricing and valuation of the underlying holdings which produced the stated performance could be incorrect, stale, or overstated and therefore the performance figures presented cannot be relied upon. Before investing, we encourage you to request additional information, particularly performance information, of any product that you are considering for your client. You should read, as applicable, the Prospectus, SAI, Composite Disclosure and/or performance disclosure associated with any product that you are considering for investment for your or your client’s. Products shown may have minimum account sizes or minimum investments which may preclude retail and non-high net worth investors from being able to invest in these products. You should be aware that certain LPs may be closed to new investors and therefore your clients may be prevented from investing in these products. Portfolio Implementation and Rationales The SMA Asset Allocation Models do not represent a personalized recommendation of a particular investment strategy to you or your clients. You should not buy or sell an investment without first considering whether it is appropriate for your client’s portfolio. Additionally, you should review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Diversification and asset allocation do not ensure a profit and do not protect against losses in declining markets. Any forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Investments in growth stocks may experience price volatility due to their sensitivity to market fluctuations and dependence on future earnings expectations. Sector allocation references to market capitalization (“smid cap” or “micro caps” etc.) may be subject to special risks given their characteristic narrow markets, limited financial resources, and less liquid stocks, all of which may cause price volatility. International/global investing can involve special risks, such as political changes and currency fluctuations. These risks are heightened in emerging markets. A significant percentage of the underlying investments in aggressive asset allocation portfolio investments have a higher-than-average risk exposure. You should consider your risk tolerance of each of your clients carefully before choosing such a strategy. An investment with multiple underlying investments (which may include asset-allocation or custom blended investments) may be subject to the expenses of those underlying investments in addition to those of the investment itself. Investments may reside in the specialty category due to 1) allowable investment flexibility that precludes classification in standard asset categories and/or 2) investment concentration in a limited group of securities or industry sectors. Investments in this category may be more volatile than less flexible and/or less concentrated investments and may be appropriate as only a minor component in an investor’s overall portfolio. Investment Managers You and your clients should carefully consider investment objectives, risks, charges, and expenses of Funds discussed. This and other important information are contained in the respective Fund prospectuses and summary prospectuses, which should be read carefully before investing. Investment portfolio statistics change over time. Current performance may be lower or higher than return data quoted herein. The investment return and the principal value of an investment will fluctuate; so, an investor’s shares/units, when redeemed, may be worth more or less than their original cost. Verdence relies heavily on unaudited third-party data. Data sources include public data, such as mutual fund data, and non-public data, such as information provided by other investment advisors and managers of limited partnership pooled accounts. Data and/or statistics included on this Portal, including references to performance, opinions, ratings, rankings, manager statistics and demographic information, product, or strategy descriptions, either quantitative or qualitative, are based upon information reasonably available to us as of the applicable date(s) then-published. Information has been obtained from sources that we believe to be reliable, but these sources cannot be guaranteed as to their accuracy or completeness. All data and information produced by a third party has the potential to be incorrect, incomplete, or otherwise misleading. No implication shall be created that the information contained on the Site is correct, including as of any time subsequent to the publish date, and Verdence does not undertake an obligation to update such information at any time after such date. Verdence makes not warranty or representation of the veracity of the data and information and its use of the information should not be implied as an endorsement of any material or statements made. Data, particularly non-public data, is subject to error and where the information is not audited, the potential for error is greater. Where shown, performance information presented is that which has been calculated and presented by an unaffiliated third-party manager. We have no insight into the performance of the advisor/product/account or fund shown and do not attempt to determine whether the performance presented is accurate. Therefore, the performance could be incorrect, overstated or not reflective of actual trading of client funds. There is the potential that the performance shown is a back test and not the result of real investment advice and trading. As such, it could not be relied upon as indicative of future returns of a particular strategy. Where performance shown is that of a pooled account, limited partnership, or private equity fund, you should be aware that there is a significant lack of transparency into the operations and investment process and investment vehicles invested in. As a result, pricing and valuation of the underlying holdings which produced the stated performance could be incorrect, stale, or overstated and therefore the performance figures presented cannot be relied upon. Before investing, we encourage you to request additional information, particularly performance information, of any product that you are considering for your client. You should read, as applicable, the Prospectus, SAI, Composite Disclosure and/or performance disclosure associated with any product that you are considering for investment for your or your client’s. Certain products shown may have account minimums or minimum investment sizes that are unattainable for your clients and therefore they may not be eligible to invest in these products. Reference to registration with the Securities and Exchange Commission (“SEC”) does not imply that the SEC has endorsed or approved the qualifications of Verdence or its respective representatives to provide any advisory services described on the Site.

Read more