March will be remembered throughout history as the month that Silicon Valley Bank collapsed. Market participants started the month focused on the Fed and inflation. Two weeks later with SVB and Credit Suisse gone, the focus shifted to whether this was the beginning of another financial crisis. 2yr yields had their largest one-day bp decline since Black Monday in 1987. For the month, 2yr yields were down 79 bps as the market started anticipating the likelihood that the Fed would need to pause and eventually cut rates. This was on the back of fears that the regional bank crisis would lead to a contraction in lending followed by a recession. Despite fears and doom and gloom talk, the SPX closed up 3.51% for the month. Sector and factor moves showed the main equities shift within the month was a rotation from beta and bad balance sheets to safety and good balance sheets.
There were some dramatic losses in the hedge fund space, which led to risk reduction just after the SVB news but by the end of the month, market participants reported that outside of the financial sector, things stabilized to where the winners and losers at this stage made sense. These recent moves are an important backdrop for where we are in the current cycle. If the banking crisis leads to tighter credit throughout the economy but is not a systemic event, the market was already priced for a recession as we entered this year. A Fed on hold, lower inflation, and a mild recession would be viewed positively by the market, leading to good dispersion opportunities as the strong remain strong and the weaker businesses suffer. Dispersion is normal coming out of a recession, so we look forward to logical risk-taking in the months ahead, with this not being a systemic event.
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