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We’ve recently witnessed the failure of two American banks, sparking fears of a wider 2008-style banking collapse.
If you’re an investor you may be wondering how the collapse of Silicon Valley Bank and Signature Bank could impact your portfolio in the long-term. You may also be wondering whether the situation presents any new investment opportunities.
In this article, we’re going to take a closer look at the current situation. Keep on reading for all of the details, or click on a link to head straight to a section…
California-based Silicon Valley Bank (SVB) was considered to be 16th largest bank in the United States. On Friday 11 March its assets were seized by the US Government after a run on its deposits. The collapse of the lender – which specialised in lending to technology companies – was the biggest since the 2008 financial crisis.
Shortly after SVB’s demise we saw another US bank, Signature Bank (SB), bite the dust. Signature was a lender to apartment owners, and its payments network also was used by a number of cryptocurrency firms. Prior to its collapse SB had more than $100 billion in assets. This made it the third-biggest banking failure in US history. .
In total, $465 billion (£382 billion) has been wiped off global financial stocks since the fall of SVB and SB.
In the UK, Lloyds, NatWest, and HSBC have all seen their share prices plummet over the past 5 days or so – with HSBC the biggest faller of the three. Its shares are down by more than 7% since last Thursday.
While we’re talking about HSBC it’s worth knowing that the recent fall in its share price fall comes after it paid a single £1 to rescue the UK arm of Silicon Valley Bank. This move was welcomed by the UK Government and Bank of England as the rescue package essentially means the state won’t have to pay anything to protect depositors.
We’ve already seen the impact of SVB and SB’s demise on global stocks, with all major US and European stock markets falling into the red on Monday.
In the UK, the FTSE 100 tumbled 2.5% on Monday – its biggest single fall since July last year. While the blue-chip index has since risen a tad, it’s down 4% since mid-February.
While many investors won’t enjoy seeing the recent fall in stocks, arguably the biggest knock-on impact will be the response of the US Government. That’s because the failure of SVB and SB has largely been attributed to rising interest rates.
If the US Government becomes fearful that further interest rate rises will see more banks hit the wall, it’s possible the Federal Reserve will halt its plans to continue raising interest rates. While this could hamper the bank’s efforts to curb inflation (Official US inflation now stands at 6%), it could have a significant impact on the value of stocks and bonds going forward.
It’s also important to understand the Bank of England is heavily influenced by the actions of the Federal Reserve. To learn more about this, and to understand how stocks and bonds are typically impacted by rising interest rates, take a look at this article.
Another knock-on impact to be aware of is the fact that we may see high levels volatility return to the stock market as investors try to second-guess the market. For example, we may continue to see further sell-offs of banking stocks.
Following the collapse of the two banks, US President Joe Biden made a hurried effort to reassure markets that the banking system was ‘safe’ on Monday. For those with savings in either bank, the US Government has pledged to guarantee all deposits under the FDIC deposit insurance coverage. This is essentially the US equivalent to the Financial Services Compensation Scheme we have in the UK, though the sums covered are a little different.
Despite Biden’s efforts to reassure investors, we know Government’s can’t control markets – just ask Lizz Truss! At best, Government figures can give a general indication as to how the state is likely to act should any turmoil continue.
While some may now be bracing themselves for another 2008, it’s worth knowing that the two banking failures we’ve seen were heavily involved in the tech industry – a sector known for its volatility. It’s also fair to assume that these banks were poorly diversified. Its one of the main reasons they were unable to cope with relatively modest interest rate rises.
As the majority of other banks aren’t structured in this way it’s unlikely we’ll see a host of bank failures in the near future. However, it’s certainly something that can’t be 100% ruled out.
During times of stock market uncertainty, investors often look for alternative places to put their money. Let’s take a look at the recent performance of two popular alternative assets held by investors: gold and bitcoin.
On Friday morning, the gold price was sitting at a relatively modest £1,527. However, when news of SVB’s possible demise broke in the afternoon, gold shot up to £1,554.
Fast forward a few days and when markets opened on Monday, gold went from £1,552 to £1,578 by mid-afternoon. This was after SVB had officially gone under of course.
While not a huge gain, don’t forget that this was during a time when stocks and shares were dropping.
At the time of writing on the afternoon of Tuesday 14 March, the value of one troy ounce of gold has fallen slightly to £1,566, So, all in all, while the gold price hasn’t rocketed since the banking failures, the precious metal has clearly honoured its reputation as being a safe asset to hold during uncertain times.
Analysing the price of Bitcoin sometimes feels like a futile endeavour given its reputation for volatility. Since the turn of the year, we’ve seen the world’s most popular cryptocurrency suffer gigantic falls and gains. However, it does seem as though the emergence of cracks in the banking industry has given digital currency a boost.
Over the past 5 days, Bitcoin has risen a colossal 25%. On Monday alone, the value of one coin rose by £2,000. At the time of writing, one Bitcoin is now worth in the region of £21,000. That’s a £4,000 rise in the space of a week. Whether Bitcoin can continue its current bull run remains to be seen of course.
There’s no doubt the collapse of SVB and SB has sent a few shock waves around the stock market.
Because of this, there will be many investors out there who will be looking to move their wealth to less-volatile assets, such as gold. Commodities may also become more attractive for investors looking to diversify away from the stock market.
For other investors, however, sliding stocks presents a good opportunity to buy shares at a knock-down price. For example, there are now a number of banking shares available for 5-10% cheaper than a week ago. While there’s noting inherently wrong with this mindset, it’s worth bearing in mind that shares that have recently fallen in price are just as likely to continue falling as they are to rise. As a result, buying shares solely because they’ve recently fallen is rarely an effective investing strategy. (To learn more about this, take a look at our article that highlights the drawbacks of ‘buying the dip‘).
Rather than trying to time the market, it’s often far better to invest for the long-term, and consider falling stocks as part and parcel of investing.
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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This isn’t financial advice. Anyone thinking of investing should conduct their own due diligence.
Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.