The week of April 24th saw many of the mega-cap stocks report earnings, with most of them posting impressive first quarter results that led to their stock prices moving higher. Microsoft, Alphabet (Google), and Meta (Facebook) all saw significant gains after their release of first quarter earnings
First, it was Silicon Valley Bank, now it’s San Francisco-based First Republic Bank taking a hit. Like Silicon Valley Bank, First Republic is another bank catering to “free-money” startups. First Republic’s shares are now down 86% from their peak in November of 2021.
The recent banking failures could be the beginning of what’s been called the most anticipated recession ever. A lack of confidence in the system can spread quickly. The fact that SVB failed in just a matter of hours was shocking and has never been seen before. The hope is the problem does not cascade to other banks and other parts of the economy.
The question everyone asked since last Thursday (3/9/23) has been “Why did Silicon Valley Bank go bust? And what does it mean for MY bank?” The best explanation is that Silicon Valley Bank (SIVB) was uniquely at risk because of its unusually low percent of individual depositors, and its unusually high portfolio of loans and securities backing up their deposits.
The Fed’s “preferred” inflation gauge (Personal Consumption Expenditures, or PCE) not only came in worse than expected, but the prior three months were all revised higher as well. “The whole thing throws a lot of cold water on the ‘disinflation’ hoopla,” observed Wolf Richter of wolfstreet.com.
The Fed has a tough challenge ahead of them with very few options. Most of the aggregate growth in the economy was financed by massive deficit spending, credit creation, and a reduction in consumer savings.