The SVB saga and bank stock volatility
The main story in markets over the last month has been the volatility we’ve seen in bank stocks. At the start of the month there was concern over the future of Silicon Valley Bank (SVB) – which caused customers to withdraw their funds at a rapid pace.
When lots of people withdraw their money from a bank at once, it’s known as a ‘bank run’ or a ‘run on the bank’. In turn, this caused further problems for SVB – which was subsequently taken over by the US regulators, adding to uncertainty in the markets.
The spotlight then turned on Swiss bank Credit Suisse, which had already been rocked by a series of crises in the last decade. In a repeat of what happened with SVB, Credit Suisse customers began withdrawing their deposits, and the Swiss regulator stepped in to organise a takeover by Credit Suisse’s long-term rival, UBS.
Whenever there’s volatility and the financial sector makes the headlines, concerns are raised about whether this is ‘another 2008’ or global financial crisis. Right now, there are no signs that this is the case.
In 2008, the problems were between banks and in the financial system as a whole – because banks stopped lending to each other which is a crucial part of the financial system. In March 2023, the problems were isolated to a couple of banks – which were already struggling with many issues, made worse by rapidly rising interest rates.
Plus, significant protections have been brought in since the financial crisis of 2008, and banks as a whole have significantly more reserves than they did back then. So while these stories cause headlines, and markets might react in the short term, a well-diversified portfolio will help to keep the long-term effects minimal.
FTSE 100 falls but S&P 500 on the up
With all that said, March was generally a bumpy month for UK stocks, and overall the FTSE 100 fell by 3.58%. But across the pond, the US’s S&P 500 increased by 4.00%.* Once again, this shows the importance of diversifying your investments.
Economies around the world will at times perform differently depending on local market conditions. So, it’s really important not to put all of your eggs in one basket – whether that’s one stock, one country’s stock market or even one type of asset. That way, a fall in one market or the other won’t drag your whole investment portfolio down with it.
This is the standard push and pull of the financial markets – one day they’re up, the next they’re down, and there’s no way for anyone to predict what they’ll do tomorrow – but over the long term, markets have historically increased.
For example, the FTSE 100 reached an all-time high in February 2023 by surpassing 8,000. So the fact that the FTSE 100 was down in March 2023 isn’t ‘bad’ news – it’s just news, and it shouldn’t deter investors.
Even more interest rate rises
We also saw that interest rates have continued to rise on both sides of the Atlantic. As a reminder, central banks use interest rates to try and control inflation – which as we all know has been consistently high for the last 18 months.
If we’re searching for a silver lining from interest rate rises – which can increase the cost of our mortgages and weigh on the value of investments – central banks will only raise interest rates if they think the economy is strong enough to weather the increases. If the economy was shrinking and inflation was as high as it is today, that would place the Bank of England in a very difficult position.
As it stands, the employment market is strong, as are retail sales, and the Bank of England was not concerned enough by the volatility in banking stocks to pause their planned rate rise to 4.25% on 23rd March. The Governor of the Bank of England has made it very clear that fighting inflation is the number one priority, so we should not be surprised by further rises over the summer.
Last but not least, March also brought the 2023 Spring Budget, where the Chancellor announced changes to pensions allowances and childcare support, as well as updating the Energy Price Guarantee.
Your questions answered
We thought this month, rather than a good news story, we’d switch it up and answer some of the most-asked questions from our customers in March. Unsurprisingly, there was a lot about market volatility and performance – so we’re giving it some good real estate in this update. Let’s get into it.
Why have my investments dropped recently?
The financial markets have been up and down a lot in the last 12 months – and that’s down to a number of factors. If you’ve been reading these bulletins for a while now, you’ll understand why.
But, the long and short of it is that to combat rising inflation levels, central banks in the UK, US and around the world, have had to raise interest rates. When interest rates go up, the stock market generally stagnates or falls because people can earn a return from the interest on their savings without the added risk of investing that money in the markets.
So, people might pull their money out of investments when interest rates rise – which then reduces demand, and means that prices for things like stocks and bonds can fall. If enough stocks fall in value, it’ll start to affect the performance of benchmark stock indices like the FTSE 100 and S&P 500, which is when people will generally say that the ‘stock market’ is falling.
The important thing to keep in mind, is that every stock market drop to date has been followed by a recovery that more than made up for the fall – and over time, investing for the long term has been shown to be one of the best ways to grow the value of your money.
What should I do when my investments are performing poorly?
Given what’s happened this month with SVB and Credit Suisse, this question is very topical. Some people will sell their investments at the first sign of trouble – similar to how SVB’s customers caused a ‘bank run’ which only helped to make the situation worse.
If you’re an investor, with holdings in diversified funds and stocks, markets falling shouldn’t worry you. Instead, it could even serve to reduce the average cost of your investment portfolio if you continue to buy when prices start to drop. It seems counterintuitive – but you need to remember that if you’re investing, you should know that it’s for the long term. You’re looking to grow your money over time – usually five years or more. That’s the minimum, and the longer you leave your money invested, and the longer you keep investing, the better for the overall performance of your investments.
So, if your investments are currently performing badly, just remember why you got into investing in the first place. It’s to grow your money over the long term – and a bumpy few months shouldn’t deter you.
*Google Finance, 1st March to 31st March 2023.