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From A Collaborative Point of View

Special Update: Navigating Bank Failures, Fed Rate Hikes, and Risks to the Financial System
March 19, 2023

The recent bank failures have sparked speculation as to what might come next. In this special update, Dan Kraus MBA, CFP®, CRPC®, APMA® covers how we are navigating these failures, fed rate hikes, and risks to the financial system.

The recent failure of three U.S. banks has raised concerns over the economy and financial system. The situation is still evolving and there is plenty of speculation as to what might come next. One recent development is that government officials from the Treasury, Federal Reserve, and FDIC have announced that depositors will be made whole in an effort to backstop the system and restore confidence. This crisis has already created hardship for many companies and individuals as payrolls are disrupted and access to cash is halted. However, when it comes to investing, it's more important than ever to stay levelheaded and focus on the big picture. What should long-term investors know about these bank failures and what do they reveal about the financial system?

Bank stocks have struggled due to recent failures

The collapse of Silicon Valley Bank (SVB) was the first FDIC-insured bank failure since 2020 and the second largest in history. This was followed two days later by the failure of Signature Bank, the third largest in history. Just a few weeks earlier, these two publicly traded companies had the 14th and 18th largest market capitalizations among U.S. banks, respectively. Silvergate, a smaller bank active in the crypto industry, also failed the same week, but through an orderly liquidation.

From a market and economic perspective, the main question is whether there is wider systemic risk to the financial system. This episode reveals that these particular banks grew too aggressively and with too little risk management as tech valuations rose and crypto prices rallied over the past several years. While this worked well in a bull market, the reversal of these trends in 2022 made these banks vulnerable to classic bank runs.

How do bank runs occur? A simplified description of the classic banking model is that customers – both businesses and individuals - deposit funds for safekeeping. Banks then use these deposits to make loans or to buy high quality investment securities which they hope can generate profits. This works well as long as these investment assets maintain or grow in value and customers trust that their deposits are safe. If either of these is not the case, a bank may not have the liquidity to meet its obligations. With this in mind, these recent failures were due to two related problems.

Banks accumulated unrealized losses on investment securities as rates spiked

First, rapidly rising interest rates and Fed rate hikes over the past year created financial stresses on bank balance sheets. Bonds had their worst performance in history in 2022, driving unrealized losses on investment assets including U.S. Treasuries, as shown in the accompanying chart. Whether banks need to book these losses depends on how these securities are accounted for, but this worsens as banks face pressure on deposits. Thus, SVB and others found themselves with assets that were worth far less as rates rose.

Second, SVB’s concentration of tech and startup customers made it vulnerable as conditions deteriorated for that sector, just as Silvergate and Signature Bank were exposed to the slowdown in the crypto industry. SVB tried to plug this gap by raising fresh capital, but this backfired since it highlighted the liquidity and solvency issues it faced. Like shouting "fire" in a crowded theater, once there is the perception of solvency problems, a classic bank run can occur swiftly, which can then become a self-fulfilling prophecy. To a large extent, this played out publicly as many in the startup and VC communities urged companies to move their funds.

While government actions are always controversial and subject to political debate, moves by Treasury, the Fed, and the FDIC to backstop customer deposits across these banks will likely help to prevent contagion effects across the system. At the same time, it does not directly address the underlying issue of impaired assets which depends on the quality of risk and asset/liability management at each bank. However, the risk that unrealized losses become a solvency issue is mitigated for larger, more diversified banks who are less reliant on deposits, have a stronger deposit base, and maintain higher amounts of capital.

These bank failures are the largest since 2008

One reason that investors may be concerned is that there have been few bank failures in recent history, especially since banking legislation such as the Dodd- Frank Act was put into place after the 2008 financial crisis. According to the FDIC, there were only 8 bank failures from 2019 to 2022, far below the 322 experienced around the global financial crisis or the hundreds that regularly occurred in the 80s and 90s. That said, SVB is an outlier in that it had total deposits of $175 billion while the 8 from 2019 to 2022 had a combined $628 million.

Naturally, there are also parallels being drawn to 2008 when the last wave of bank failures threatened the global financial system. It's important to keep in mind that, back then, the problem was not just that all banks held significant amounts of mortgage-backed securities and other housing-sensitive assets that ended up being worth only pennies on the dollar. Rather, significant amounts of leverage coupled with new financial instruments such as collateralized debt obligations allowed a housing crisis to turn into a financial meltdown. While it's unclear exactly how this episode will play out, many banks today are much better capitalized and do not primarily rely on tech or crypto deposits. Additionally, any economic spillover has so far been concentrated in the technology and venture capital industries which were already struggling with layoffs and a slowdown in demand.

These developments impact the Fed's upcoming rate decisions since they underscore an unintended consequence of rapid rate hikes. It's likely that this creates a new sense of caution for the Fed as they continue to battle inflation. According to market-based measures, investors no longer expect the Fed to raise rates again this year, but believe that there may be a rate cut by September. Interest rates have also fallen with the 2-year Treasury yield declining over one percentage point to around 4.1%. While these expectations can change rapidly, they show how much sentiment has shifted in the past week.

The bottom line? While recent bank failures are problematic, parallels to 2008 are premature. Investors ought to stay diversified as the situation stabilizes, while focusing on the big picture rather than minute-by-minute speculation.

So what is the big picture? Mixed signals.

From an economic view, the US GDP is expanding again even while the money supply is contracting. This is a healthy sign that, at least so far, the economy is managing the storm of Federal Reserve credit tightening. And while the bank failures discussed above, and the recent escalation in layoffs, are definitely signs of cracks in the health of the economy, overall measures of economic conditions at this point are mixed. For example, the ISM Manufacturing Index shows clear slowing and recessionary readings, while the ISM Services Index is still positive indicating economic expansion.

How do the economic mixed signals translate to the stock market? The markets move sideways.

As you can see from the chart below, large US company stocks are trading at the same price as March of 2021 and May of 2022. While the media is full of theories about why stocks should plunge or skyrocket... sometimes stocks just move sideways. When the economy is sending so many mixed signals, that is often what happens. 

This kind of consolidation is very healthy over the long-term. It allows the weaker companies to close or be bought, while the stronger ones have the opportunity to make their businesses more efficient in preparation for the next leg of growth. While frustrating for investors, markets do not always grow in a consistent manner. Sometimes growth is slow or zero, sometimes it is fast, and sometimes it moves in reverse for a short period.

Looking forward and looking up.

In our last market commentary in Q4 2022 we discussed that investors will need patience in the coming months while interest rates continue higher. That reality is still in place, and the Federal Reserve (and global Central Banks generally) are not done tightening financial conditions.  However, while markets can always go lower when sudden crises happen, we are likely nearer to the end of the bear market caused by the Federal Reserve rate hikes.

What would cause the market to rally, possibly as soon as the 2nd half of 2023?  Anything that can cause corporate earnings to rise. A few ideas are currently coming into focus:

  • The rapid introduction of artificial intelligence tools could dramatically improve productivity in the Services sector of the economy, something that was lacking in the prior expansion. In particular, the cost of software development, legal services, medical services, and customer support may start to fall in meaningful ways over the coming years as a result of AI. That is without some of the larger potential developments like self-driving cars.
  • Hybrid/remote work means smaller office real estate footprints. While this may not be ideal for landlords it is clearly good for corporate earnings.
  • Companies, particularly in technology, are starting to get religion on efficiency and reducing spending. When leading companies like Meta (Facebook), Apple, and Amazon start to cut back on staffing growth, and perks generally, it has a strong influence on the rest of businesses.

As we have said in the past, the seeds of the next rally are always sown in the midst of the current downturn. This time is no different.


Austin Private Wealth is a Registered Investment Adviser. This commentary is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Austin Private Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Austin Private Wealth unless a client service agreement is in place.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Austin Private Wealth employees providing such comments, and should not be regarded as a description of advisory services provided by Austin Private Wealth or performance returns of any Austin Private Wealth Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Austin Private Wealth manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
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Join Kevin Weaver, CFP® as he reviews what key changes from Secure Act 2.0 present the most interesting financial planning opportunities.

  • It’s the time of year to spread holiday cheer! Kieu Le Turk, CFP® is here to share a great way for to support the charities near and dear to your heart, get a double tax break on your gifting, and take advantage of Apple’s $10k matching gift program.

    There are five main steps to do this:

    1.  Open a Donor Advised Fund
    • This step is easy! You can do this with most major financial institutions, or our APW team would be happy to open an account for you! Let’s instead discuss what a DAF is.
    •  A donor advised fund is a giving account established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction, and make grants from the fund to charities over time. Donors can contribute cash, securities, or assets – like highly appreciated Apple stock! Remember, this is an irrevocable contribution. While you can still control the funds, the money is no longer yours.
    2.  Gift your Apple shares with the lowest purchase price to your DAF
    • Jump onto E-Trade and find the Apple shares with the lowest purchase price. Transfer the number of shares that add up to the dollar amount you want to donate to your new DAF.
    •  Why are we choosing shares with the lowest purchase price?
    •  If you sell shares with the lowest purchase price, any gain on those shares will be taxed at capital gains rate – either 15% or 20%, depending on your tax situation. If you donate highly appreciated stock, you can avoid the capital gains tax on the gain of the stock.
    •  It is important to note – this strategy works on shares held for more than a year and charitable contributions of non-cash assets are tax deductible up to 30% of adjusted gross income.
    •  Check with a tax advisor for all things tax related.
    •  Apple is so generous; they annually match your charitable giving up to $10,000! On E-trade, select the shares with the lowest purchase price and calculate how many shares add up to the amount you want to be matched. Confirm and submit the transfer to your DAF.
    •  Keep in mind, you don’t have to gift Apple stock to still benefit from this strategy.
    3. Start gifting to your favorite charities from your DAF
    • This is the fun step! Once you shares hit the DAF it will be immediately sold. The proceeds will be invested in a fund that you preselected when you established the account. Either a conservative, balance, or growth fund. This is where our APW advisors can help you with these decisions.
    •  At this point, you can start gifting to your favorite charities from that fund! Choose your charity, decide how much, how often, and who to dedicate to. You can repeat the process if you’re giving to multiple charities.
    4.  Save the contribution receipts from your DAF website
    • Once you have completed step three, you will need to give yourself a few days for the grant to be submitted. You may then log in to your DAF website to download the contribution receipts for each donation that you submitted.
    •  These contribution receipts will need to be submitted to Apple in order to receive the dollar-for-dollar company match.
    5.  Request a company price match from Apple
    • On the main Benevity Apple Employee Giving page, you will be able to request a match. There, you will enter the information of your donation.
    •  Use the charity’s tax ID number to designate the non-profit you gifted to. Enter the date from your contribution receipts and upload them. Be sure to review all the information, then confirm and submit your request.
    •  Then, you’re all done! Log back in a few days later to make sure Apple sent their match to your charity.

    As you can see, giving to charity can be a very straight forward process. However, there can be some complicated financial issues surrounding it. As Apple employees, you have a such a great opportunity to support your favorite charities and further their cause – all while getting some significant tax benefits!

    At Austin Private Wealth, we are happy to help you figure out the best way to use this strategy for your charitable giving.

  • The key word for this quarter - patience.

    In this quarter's market commentary, Dan Kraus MBA, CFP®, CRPC®, APMA® addresses the Fed rate hike cycle, the three legs of inflation, and the single worst decline for fixed income in our lifetimes.

  • Worried about tax consequences associated with selling your home or investment properties? Raoul Celerier, CFP®, CEP®, CRPC® is here to discuss strategies for exiting Real Estate in the most tax advantageous position.
    At Austin Private Wealth, we feel that Real Estate assets are an integral part of our clients' net worth. Our expert advisors are dedicated to helping you determine the best option for managing all your investments, including Real Estate.

  • APW Investment Committee Q3 2022 Commentary

     Q2 2022 Review (For Text, please continue to scroll through this page)

    Name 04/01/2022 – 06/30/2022
    Year to Date
    S&P 500 - 16.10%
    Russell 2000 -17.20%
    MSCI Emerging Markets -11.34%
    MSCI EAFE -14.29%
    Nasdaq 100 
    Bloomberg US Aggregate Bond -4.69% -10.35%

    Source:  Ycharts

    The first half of 2022 was one of the worst January to June periods for both stocks and bonds ever, as declines continued unabated from an already poor first quarter. Inflation continues to soar, with a year over year growth rate of 9.1% as of this writing. The Federal Reserve in response has started to accelerate rate hikes with a large 0.75% increase to the Federal Funds rate at the last meeting. The old adage “Don’t fight the Fed,” seems as apropos as ever. Virtually all assets globally, with the obvious exception of commodities, have plummeted in response.  

    Another major development this year is the rise of the U.S. dollar against a basket of major global currencies. It is now at levels last seen 20 years ago. 

     Austin Private Wealth Model Changes

    • Consistent with our discussions in the last quarterly commentary, in April we sold 100% of Doubleline Total Return Bond Fund (DBLTX) and Loomis Sayles Core Plus Bond Fund (NERYX) in most taxable accounts. Additionally, we sold all of Western Asset Managed Municipals Fund (SMMYX) and iShares National Muni Bond ETF (MUB) in most tax sensitive portfolios. These funds were moved to money market positions where possible or are otherwise held in the brokerage sweep account. These positions represented the majority of our fixed income exposure (60% at that time).
    • In early June we added a small position (10% of fixed income exposure) in PIMCO Enhanced Low Duration Active ETF (LDUR) to taxable accounts and iShares Short-Term National Muni Bond ETF (SUB) to tax sensitive portfolios. The idea is to slowly go back into bonds as yields rise, but with lower overall duration.
    • At this time we still hold 50% of our fixed income exposure in cash as we believe that even intermediate bond rates could continue to rise. This offers the additional opportunity to “replenish” equity positions back to the target allocation if those markets continue to decline.


    It is impossible to discuss the market outlook without first addressing the elephant in the room – inflation. There are 3 primary inputs that can contribute to inflation: 

    1. Constraints to the supply of goods, services, and labor
    2. Too much financial liquidity
    3. Surging demand

    One point that is often overlooked in our partisan political environment is that the current inflation is a global phenomenon. Much of that is driven by the supply chain issues caused by COVID lockdowns in China and the Russia/Ukraine War. Had these things not happened, while inflation would still be trending upward, it is unlikely that the US or any country would be reaching 40-year inflation highs.  

    Nonetheless, the final Biden Administration stimulus package (which was $1.9 trillion in 2021) along with the Federal Reserve’s incredibly slow policy change, left United States with massive, excess liquidity. In retrospect it seems obvious that the convergence of NFTs selling for tens of millions of dollars, meme stocks trading at stratospheric prices, and incredibly sketchy SPAC deals getting oversubscribed on Wall Street, was the blinking neon sign of a market top.   

    Finally, demand has only just started to abate. Take a look at this chart that shows the massive increase… roughly 40% in two years in US imports.  

    Many believe that inflation is near a top and that already the Federal Reserve’s actions are pulling so much liquidity out of the system that demand is being crushed and a recession looms. Some commodity prices such as lumber are down substantially from their recent highs. Other important inputs like semiconductor prices have started to come down. Even the powerful US residential real estate market appears to have cooled in the past 60 days. And for US consumers, the strength in the dollar also appears to be helping a lot.  

    We believe that the cooling of inflation is not a switch that turns on and off and will likely stay high through the 3rd quarter as lower readings in Q3 2021 fall off the calculation. It takes time for the economy to shift gears and the labor market is still very strong. This makes us maintain our cautious view on bonds. While rates have gone up and value has improved, the risk/reward still does not appear very attractive in most categories. 

    Equity markets on the other hand have significantly repriced, and now appear closer to a bottom. The exact timing is impossible to forecast. Q2 earnings have just started and will likely take down 2022 earnings estimates and beyond. That will put near-term downward pressure on stocks. Given the historic economic forces at play it would not be surprising to see a decline of another 10% from here. Further, if you believe as we do, the mantra we mentioned at the beginning of this commentary, “Don’t fight the Fed” then we also need to see the Fed stop tightening financial conditions (or the market to believe that they will soon) before an equity market recovery can start in earnest.  

    For those with a long-term outlook, prices are starting to look much more attractive. We expect to look for opportunities for our investors to increase equity exposure as prices fall from here. It is essential to remember at times like these, that prices only fall because of all the gloom and doom, but ultimately companies make changes, government policies adjust, confidence improves… and stocks recover and grow.  

    One final thought, a collapse in consumer sentiment is one historically good indicator of a market bottom. As sentiment is at its worst, the seeds of a stock market recovery are usually just beginning. It’s not a perfect indicator, but pretty good. Below is a snapshot of the last 50 years. In fact, the recent readings are the lowest in the history of the survey going back even further! That bodes well for future stock prices.

    Austin Private Wealth, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Austin Private Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Austin Private Wealth, LLC unless a client service agreement is in place.