The rapid failure of Silicon Valley Bank (SVB) spiked fear early in the month. U.S. stocks fell by about 4% at the outset of the crisis but recovered losses relatively quickly. To help maintain confidence in the banking sector, the Federal Reserve announced measures guaranteeing depositors would get full access to all their funds regardless of FDIC limits and created a program to support other banks with unrealized losses on bond holdings.

These measures, along with support from larger banks, helped stabilize the situation, though it remains fluid. Fortunately, while the concept of rising interest rates creating problems for banks are not isolated to SVB, the magnitude and specific circumstances appear somewhat unique. Historically, most bank failures stem from loan defaults and are often tied to the economic cycle. This one was not.

Many investors are grabbing onto the idea that the crisis will force the Fed to stop or slow additional rate hikes, and perhaps start to cut rates sooner. Bonds have rallied, with Two Year Treasury yields dropping around 1% since SVB failed. Once again, at least for now, bad news for the economy is on balance being received as a positive by equity and bond markets.

Gains during the month were concentrated in growth stocks, many of which suffered large losses in 2022. Lower rates are widely perceived as more beneficial for growth stocks, while value has a larger concentration in financials which were more impacted by SVB. Small cap stocks, which also include a heavy weighting to regional banks, were lower in March. Sector and style rotations are normal and create an opportunity for those who remain diversified and periodically rebalance.