We have no special insights into the likely depth or duration of the banking crisis, but the impact on credit has already been severe. That might seal the fate of the economic expansion. It’s worth noting that in 2008, the recession seemed to have “caused” the credit crunch—not the other way around.
Growth and Tech have been the flagrant winners YTD, yet the SVB crisis triggered further bifurcation: Since SVB failed, it’s been important to own only “big” Growth and “big” Technology, amplifying the multiples of monster stocks, like MSFT and AAPL. Can a major market low occur when investors are herded in a handful of the most richly-priced public companies in history?
One of the most vivid memories of the Great Depression is the sight of nervous depositors lined up outside a bank hoping to withdraw their meager savings before the bank failed. Like a rare tropical disease that was thought to be eradicated by modern medicine, the classic bank run reappeared this month in the form of Silicon Valley Bank. At the beginning of March, the market had no particular concerns about the potential for systemic bank failures, but SVB’s sudden demise has cast a pall over the entire industry.
Many are calling 1985 a stock picker's year, but I don't see it that way. Looking at the market in terms of themes or broad sectors there were some very strong performance divergences. For the year, Regional Banks, Medical Technology and Ethical Drugs were outstanding and in the fourth quarter, big classic growth stocks and technology stocks came on strong.
Our Financials Sector Ranking has been strengthening since August—well before the Trump Bump. The addition of Regional Banks to our SI Portfolio boosts our Financials exposure to an overweight 26% versus the S&P 500’s 15% weight. Reinsurance and Developed Diversified Banks are also among the Attractively-rated options for diversification within the sector.
Forces specifically driving many Financials groups include expectations for an ongoing yield rally and a steepening yield curve, tax cuts, and loosening financial regulation. While these outcomes remain largely speculation, the odds have improved and any of these developments would be a welcome change.
Small Biotech, Managed Health Care and Internet Retail continue to lead YTD.
Select Industries had no group deactivations again this month, but we trimmed a few groups and added Commodity Chemicals. All group holdings currently rate Attractive. Global Industries had no changes. Emerging Electric Utilities, which we added last month, was the second best performing group in March.
Select Industries had no group deactivations this month, and we made no significant changes to our group weights. All group holdings currently rate Attractive. Global Industries eliminated our longest tenured group, Regional Banks, which we held for two years. We added Emerging Electric Utilities, which is our first EM oriented group since June 2013.