Closing Thoughts for the Week

When two competing forces, such as Fed liquidity and a potential banking crisis, collide, it often creates a lot of volatility in the markets. I think that’s probably what we’re going to see next week and likely further into April. The Fed looks like it’s really stuck here. This past week's events suggest there’s a lack of control to both the situation and the central bank’s response to it.

The Fed is about to be put to the test next week at its quarterly meeting. It appears as though stealth QE might be in progress as the liquidity flood has resumed. A look under the hood and how much liquidity is actually being pumped into the system suggests that risk-off creates a delayed risk-on. Much like we saw stocks and bonds declining at the same time in 2022, the return of risk-on could feature both moving back up.

The collapse of Silicon Valley Bank will become the 2nd largest U.S. bank failure in history. The million dollar question now becomes is this an isolated one-off event or the canary in the coal mine? The declines we saw in most of the big bank ETFs this week are probably overdone. We’ll find out in time if this was idiosyncratic or systemic, but I don’t think the warning signs should be ignored. In the end, it looked like a textbook risk-off week.