The first quarter of 2023 saw a marked reversal of several market trends we observed in 2022.
Most notably, both stocks and bonds had positive returns in the quarter, after both declining last
year. Growth stocks, especially technology names, trounced their value counterparts, as the
predominantly value-oriented sectors of financials and energy took a big hit. And in bonds, long
duration outpaced short duration, a reversal from last year. One trend that continued into 2023
is the outperformance of international developed equities, helped by a weaker dollar, cheaper
relative valuations, and surprisingly robust earnings.
|Index||4Q22 (01/01/23-3/31/23)||1 Year (04/01/22-03/31/23)|
|S&P 500 Index||7.5%||-7.7%|
|Russell 2000 Index||2.7%||-11.6%|
|MSCI EAFE Index||8.5%||-1.4%|
|MSCI Emerging Markets Index||4.0%||-10.7%|
|Bloomberg US Aggregate Bond Index||3.0%||-4.8%|
Another trend that continued into 2023 is the focus on the Fed and the path of interest rates.
The banking crisis that hit in mid-March added a new consideration for the Fed in its ongoing
charge of managing inflation and employment. Investors appear to believe the stress in the
banking system will require the Fed to slow down or potentially even reverse the path of future
rate hikes. However, the Fed’s talking points remain mostly hawkish as we approach the next
How bad is the banking situation?
On March 7, 2023, Chairman Powell testified in front of Congress and stated that interest rates
were “likely to be higher” than previously anticipated; markets immediately priced in additional
rate hikes. Just a few days later, Silicon Valley Bank (SVB), the 16th-largest bank in the United
States, collapsed as depositors started withdrawing cash in droves. SVB was followed by the
collapse of Signature Bank, which prompted the implementation of federally sponsored
backstops and credit facilities to provide much needed liquidity into the banking system.
Well before the demise of these two banks, depositors had already begun withdrawing bank
funds to take advantage of higher-yielding alternatives. The fear of additional bank failures,
coupled with concern about insufficient FDIC coverage exacerbated this flight, mostly from
regional banks thought to be in the same boat as SVB and Signature Bank. The banking troubles
were not contained to only the U.S, as Credit Suisse, one of the largest Swiss banks, had to be
rescued by a merger with another large Swiss bank, UBS.
For perspective, SVB is the second-largest US bank failure in history as it held $209 billion in
assets at the time of its collapse. Even after adjusting for inflation, by assets, it trails only
Washington Mutual, which held $434 billion in assets when it failed in 2008.
While the failure of SVB is troubling, given their unusual deposit base and unique shortcomings,
it is unlikely we will see a run of bank failures any time soon. Keep in mind, it is not unusual for
a few U.S. banks to fail in any given year – the last time a bank backed by the FDIC failed was
October 23, 2020, when Almena State Bank closed its doors. There were 297 bank failures in the
Great Recession, and since that time, 371 more banks have closed their doors.
Brief History of the FDIC
Throughout history, there have been numerous instances of banks that were unable to meet
their financial obligations, resulting in the loss of depositor’s money. In the United States, the
Federal Deposit Insurance Corporation (FDIC) was created in direct response to the Great
Depression of the 1930s, which saw the failure of over 9,000 banks.
The FDIC is an independent agency of the federal government that provides insurance to
depositors if their bank fails. The FDIC is funded by premiums paid by member banks, and it
guarantees deposits up to a certain amount. The current limit is $250,000 per depositor, per
insured bank. This means that if a bank fails, the FDIC will step in and ensure that depositors
get their money back up to the insurance limit. The National Credit Union Association (NCUA)
operates like the FDIC, but serves credit unions, with the equivalent $250,000 per depositor,
per insured credit union.
What can Investors do to protect their cash?
The recent bank failures have highlighted the importance of diversifying your cash holdings and
exploring bank alternatives for operating cash balances exceeding $250,000, which is the
maximum amount covered by the FDIC or NCUA.
Some options to consider are:
Bank Money market accounts are a mix of checking and savings accounts. Available at
banks and credit unions, money market accounts offer several appealing features for consumers,
such as higher interest rates, debit card and check-writing privileges, and are insured through
the FDIC or NCUA.
A depositor can optimize their FDIC or NCUA insurance by having accounts in various
ownership categories. Each account category would qualify for the $250,000 coverage limit. For
example, if you and your spouse or partner each have a single account insured up to $250,000,
together, you will have a total of $500,000 coverage. Joint accounts qualify for another
$250,000 each of coverage. Insured bank instruments in trust accounts and IRAs qualify for the
maximum coverage as well.
Online cash management accounts, or high yield savings accounts, can offer higher yields
on deposits while maintaining easy access to funds. These accounts are offered by various
financial companies and provide FDIC-insured deposit accounts.
Certificates of Deposits (CDs) typically pay a higher interest rate than savings and money
market accounts because of their term structure, meaning an investor will agree to keep deposit
at the financial institution for a specified amount of time (i.e., 6 months, 12 months, 3 years,
etc.). The higher interest rate is compensation for illiquidity. In aggregate, CDs can be insured
by the FDIC or NCUA up to the $250,000 limit and may make sense for consumers who will not
need access to those funds for the specified time. If they seek access, they could incur an early
Money market funds are a type of mutual fund that invests in short-term, low-risk securities
such as government bonds and commercial paper. They are designed to provide stability and
liquidity for investors.
Money market funds are not FDIC-insured, but they are regulated by the Securities and
Exchange Commission (SEC). They offer competitive yields and easy access to funds, making
them a popular alternative to traditional bank accounts for large cash balances.
Money market funds are issued in shares, and fund managers try to keep the price per share
(also referred to as the net asset value, or NAV) at a $1. While it is rare that a money market
fund would lose investor money (often referred to as “breaking the buck”), it has happened as
recently as 2008 during the financial crisis when the Reserve Primary Fund could only pay
investors 97 cents on every dollar invested resulting in its liquidation.
How will the banking crisis be addressed?
For now, investors have remained resilient, even in the face of March’s unexpected banking
issues. The ongoing strain in the banking sector could pose a significant risk to the broader
economy, as it threatens the stability of financial institutions and hampers credit availability.
Policymakers will need to find a delicate balance between ensuring the stability of the financial
system and maintaining the effectiveness of the rate hikes in combating inflation.
At Wealth Dimensions, we have regular conversations with our clients about the prudence of
diversifying their cash holdings regardless of the state of the banking industry at any given time.
We heartily encourage all clients, whether small business owners or individuals, to minimize
their exposure to excess deposits.
Our investment methodology includes both equities and fixed income. In the fixed income
space, we are maintaining our high quality, short/intermediate-term duration positions
primarily in government vehicles. We also maintain some liquidity in accounts using one of
three money market instruments, which are the Treasury, Government (other agencies), and
Prime (government and corporate). In times of financial stress, we may choose to strengthen
our liquid positions by moving those in prime money market funds to Treasury funds for added
safety and liquidity of these assets.
As we approach the second half of the year, we remain vigilant in monitoring events that might
have a bearing on our portfolios as we continue seeking to minimize volatility and capture
capital appreciation offered by the markets. This, of course, is in the context of our prudent
ongoing planning discussions.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.