Tag: Jpmorgan

This story originally appeared on Business Insider.

With the recent collapses of Silicon Valley Bank and Signature Bank drawing comparisons to the Global Financial Crisis, the stakes have never been higher for the Federal Reserve than they were during this week’s FOMC meeting.

After embarking on a rapid rate-hiking cycle starting last March, the US central bank now has to walk a delicate tightrope between mitigating the banking crisis while simultaneously reigning in runaway inflation. In a year almost certainly fated to end in recession, the turbulence currently roiling the financial industry might seem, at least on the surface, catastrophic for markets.

But while it’s certainly understandable that any parallels to the 2008 recession may shake investors, it’s also important to keep in mind that short-term market fluctuations can oftentimes be due to noise rather than any long-term fundamental trends, wrote JPMorgan’s Jacob Manoukian.

“In an average year, the stock market sees a close to 15% peak-to-trough decline. Currently, the year-to-date drawdown is 8%. While drawdowns are never comfortable, what we are seeing in markets is, at the surface, normal,” Manoukian, the US head of investment strategy at JPMorgan Private Bank, wrote in a note on Thursday. “So while we look at the dynamics currently in play and consider what they might mean for you, keep that long-term perspective in mind.”

Takeaway #1: SVB and Signature Bank were special cases

For instance, Manoukian wrote that any investors worried about potential contagion from the Silicon Valley Bank, or SVB, and Signature Bank collapses should keep in mind that both banks were fundamentally different from others due to their capital concentration.

Both SVB and Signature Bank had an unusually high concentration of large deposits above the $250,000 threshold insured by the Federal Deposit Insurance Corporation. In addition, most of SVB depositors were made up of venture funds and their investments, with less than 10% of the bank’s deposits made up of retail capital.

JPMorgan Private Bank

Although both banks have already been bailed out by the federal government, Manoukian noted that banks will most likely practice more conservative lending practices going forward. While diminishing the amount of available credit could slow down economic growth, more conservative lending practices could also tighten monetary policy, ultimately helping to bring down sticky inflation.

Takeaway #2: Say goodbye to the tech recession

Besides their deposit makeup separating them from regional banks, both SVB and Signature Bank were also highly concentrated in specific sectors. SVB’s focus was on technology, healthcare, and life sciences, with over one-third of its deposit base from early-stage companies in these industries, while Signature Bank was highly concentrated in cryptocurrencies.

“Such companies are often (as yet) unprofitable, speculative and digitally enabled,” Manoukian wrote. “They soared during lockdowns, when lives moved online and interest rates were extremely low. But now, under the opposite conditions (public life reopening, the quickest rate hikes in a generation), investors are far less enthusiastic, capital markets have largely been closed to them, and fundraising has become difficult,” he wrote. Manoukian added that the collapse of SVB was just another hallmark of the recession the technology sector currently faces.

Although 481 tech companies have already announced layoffs this year, Manoukian noted that these headcount reductions seem to have peaked in January — a tentative sign that the tech recession may already well be on the road towards recovery.

JPMorgan Private Bank

“It has been a rough stretch for the technology complex in general, but it may be time for investors to start to sort through the wreckage. We expect to see opportunities in businesses with leaner cost structures and sustainable business models that may be valued at a discount,” he wrote.

Takeaway #3: A “goldilocks” labor market

The same day SVB collapsed, the February jobs report revealed that the labor market was neither too hot nor too cold, but chugging along without unconstrained wage growth, Manoukian said.

“It has been a rough stretch for the technology complex in general, but it may be time for investors to start to sort through the wreckage. We expect to see opportunities in businesses with leaner cost structures and sustainable business models that may be valued at a discount,” he wrote.

“It has been a rough stretch for the technology complex in general, but it may be time for investors to start to sort through the wreckage. We expect to see opportunities in businesses with leaner cost structures and sustainable business models that may be valued at a discount,” he wrote.

JPMorgan Private Bank

“The turmoil in the banking sector will likely curtail new lending, and thus economic growth and inflation. The Fed may not have to raise rates quite as far as we had thought just a few weeks ago,” he added. “The bad news: it probably also raises recession risks.”

Takeaway #4: Don’t let the noise distract you from your long-term goals

Although markets remain highly volatile and uncertain in the short term, Manoukian emphasized that investors are best served by sticking to their long-term plan, since equity returns in the long run are much less volatile, and in fact have always been positive over a 20-year horizon.

JPMorgan Private Bank

Additionally, Manoukian noted that market volatility tends to cluster. “Our research shows that seven of the 10 best days for the equity market over the past 20 years have occurred within 15 days of the 10 worst days. If you missed just the 10 best days, it would have reduced your total return by 4% per year, relative to staying invested,” he wrote.

Even with daunting odds ahead, investors should keep their long-term goals and investment plans in mind to prevent making any rash decisions during any short-term selloffs. “While there could be more strain ahead, policymakers have the tools to mitigate a great deal of risk and point to a clearer path forward. Coming back to that long-term mindset can do the same for you,” Manoukian concluded.