FROM OUR DESK

Policymakers Come to the Rescue of Beleaguered Banks

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

If you’re a big fan of St. Patrick’s Day like we are, you will wake up on the 17^th, daydreaming of what’s to come. You can smell delicious, corned beef, cabbage, and the faint richness of Guinness floating in the air. You can almost taste it. Everywhere you look, you’re seeing green. Shamrocks on clothing, grand banners, even the milk! Everyone seems to be in a giddy mood, there’s an electricity in the air, you feel it. You’re looking forward to the parade tonight where you’ll watch and listen as the space fills up with laughter and smiles.

We know we’re not the only ones dreaming of the festivities. Countless people honor St. Patrick’s Day. In fact, this holiday gets observed on an international level – over 200 countries take part in the celebration! Can you believe it? We love learning how countries show their pride for the Irish holiday and wanted to share a few with you.

Chicago, Illinois –Every year since 1962, Chicago dyes the river a beautiful bright green before the St. Patrick’s Day parade. It’s quite the spectacle, everyone comes out to watch the magic of the river changing colors. The recipe for the magic dye is a well-guarded secret; perhaps leprechaun trickery is involved?

Sydney, Australia – Australia currently holds the title for the largest St. Patty’s celebration in the southern hemisphere. Not only is the Sydney Opera House lit up with green lights, the town gets a full makeover! The entire area is transformed into an Irish village with food, music, and even a children’s parade. They’ve earned those bragging rights.

Montserrat – Outside of Ireland, this small island is the only country where March 17^th is a national public holiday. There, the festival spans over a 10-day period! It both commemorates the slave freedom fighters’ rebellion of 1768 and acknowledges the Irish ancestry of many of its inhabitants. It’s a unique celebration blending two heritages with traditional masquerade costumes, steel drums, goat stew, and a freedom run.

Rio de Janeiro, Brazil – The massive 98-foot Christ the Redeemer Statue gets a glowing transformation for the holiday. The emerald lights illuminate the statue in honor of St. Patrick’s Day. At night, the local Irish pubs host special events that include live music, trivia, and fun giveaways.

As you can see, St. Patrick’s Day is a worldwide phenomenon!  Hopefully this letter was able to give you a little glimpse of how the event is observed around the globe.  Now that we’ve gotten you into the spirit of St. Patrick’s Day, you can feel confident celebrating the holiday however you wish. Maybe you can even start up some new traditions of your own. Whatever you decide, may the luck o’ the Irish ever be on your side!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

For most of us, the words “bank failure” immediately trigger the same recent memory: the financial crisis of 2008. That was a year no investor could ever forget. The year some of the largest, most storied financial institutions in the world — think Lehman Brothers, Bear Stearns, and others — collapsed, never to return.

Similarly, for anyone who has studied history, the words “run on the bank” immediately trigger images of the early days of the Great Depression. For others, it’s perhaps scenes from It’s a Wonderful Life.  (Or Mary Poppins, if you prefer.)  Dramatic moments now consigned to the waste bin of time. Surely not something that could happen in this day and age.

But on Friday, March 10, all these words — bank failure, bank run – happened to the Silicon Valley Bank in northern California. It’s an event that has many investors, scarred by the memory of 2008, wondering if the same thing could happen to other banks.  An event that has only added to the fearful mood currently pervading the markets.

As you probably know, when the news broke on Friday morning, all three major indices immediately tumbled, capping off a rough week for the markets.  So, we want to briefly explain what’s going on with this semi-obscure bank and why it spooked investors.  Then, we want to go over what we can learn from it.

Prior to collapsing, Silicon Valley Bank was the 16^th largest in the country, holding approximately $209 billion in assets.¹  If you’ve never heard of it before, it’s probably because the bank specialized in lending money to start-up companies; the kind of fledgling tech firms Silicon Valley breeds each year.  Now, it has the dubious distinction of being the largest bank to fail since 2008.¹

So how did a bank this large fail so suddenly?  Truth be told, it’s a tale that anyone who lived through 2008 also remembers well: The bank simply made too many bad decisions at precisely the wrong time.  During the pandemic, tech companies saw a surge in business.  This led to a host of new, hopeful tech companies popping up, each flush with venture capital.  As a result, banks that specialize in serving these types of companies enjoyed their own surge: A surge in deposits.

Silicon Valley Bank (SVB) was one of these banks.  But while business was booming, this was also when the problems started.  You see, like most banks, SVB only keeps a fraction of its deposits in-house at any given time.  The rest is lent out or invested.  In this case, SVB purchased tens of billions of dollars in U.S. Treasury bonds.

To be fair, there was a certain logic here.  Treasury bonds are historically seen as one of the safest investments in the world.  Given the market uncertainty we saw during the pandemic, the bank probably thought it was being prudent with customers’ money.  Unfortunately, the bank forgot one important detail: While Treasurys don’t usually see the kind of volatility that stocks or other securities do, they are vulnerable to a very specific kind of risk.  The risk of rising interest rates.

While this was going on, the economy started changing.  Inflation skyrocketed.  Interest rates, in turn, rose to the highest levels in decades.  That meant all those Treasurys purchased when interest rates were low were suddenly far less valuable.  (Newer government bonds pay far more in interest than those purchased before the rate hikes began.)  At the same time, those tech companies that profited during the pandemic saw business – and their stock prices – fall.  For SVB, that meant fewer and fewer deposits coming in.  Suddenly, SVB was faced with a nightmare scenario: A lack of liquidity and a lack of new funds.

None of that might have mattered so long as customers didn’t start withdrawing their money.  Of course, that’s exactly what happened.  Faced with their own economic distress, all those tech companies – and their executives – started asking for their money back.  Given that they only kept a fraction of that money in reserve, SVB had no choice but to sell its investments at a major discount.  The result was a major loss of nearly $2 billion, which the bank revealed earlier in the week.¹

When news of the situation got out, customers began panicking.  This led to a classic, seldom-seen-but-much-feared scenario: A run on the bank.

In the days that followed, the bank was unable to stop the bleeding.  So, on Friday, the government stepped in and took control of the bank’s remaining $175 billion in customer deposits.²

Okay.  That’s the story.  But why the impact on the markets?

Aside from being eerily similar to 2008 – a bank makes risky financial decisions at the exact wrong time and crumbles – the situation has investors wondering if there are other banks out there that might soon experience the same problem.  No surprise, then, that shares of banks with similar business models have fallen sharply over the last two days.

But it’s more than that.  Right now, investors are gripped with fears of a recession.  On the surface, that may seem counterintuitive, as most areas of the economy remain in decent health.  But until the economy cools down, inflation will continue to run hot…which means the Federal Reserve will continue to raise interest rates.  (Indeed, the Fed chairman announced on March 8 that he expects rates to rise “higher than previously anticipated.”)³

With each rate hike, the threat of a recession grows larger.

Right now, investors are hyper-sensitive to anything that looks like the first sign of a recession.  And the failure of a major bank certainly qualifies.  Hence the turmoil we’ve seen in the markets this week.  Hence the volatility we may keep seeing.

So, what can we learn from this?  To our minds, there are a few lessons:

1. When making investing decisions, always prioritize your long-term goals. In the wake of the pandemic, SVB made too many short-term decisions that locked up its long-term options.  We will never do that.  Here at Hudock Capital Group, our approach will always be to take the slower-but-surer path to your financial goals.  We will always emulate the tortoise, not the hare.
2. Never forget the importance of liquidity. We are not a bank.  We are human beings, and human beings must contend with the unexpected.  That means we sometimes need quick access to our money.  That’s why we will always invest, save, and plan accordingly.
3. Hold to our long-term strategy and never invest based on stories or emotions. Right now, too many investors are trying to divine when a recession will strike.  They are overreacting to every headline.  We won’t do that, either.

We are experiencing a time of uncertainty in the markets.  Such times are rarely fun, but they’re not unexpected.  The good news is that our team continues to have confidence in both our long-term strategy and the road you are taking toward your financial goals.  We will continue to monitor the markets very carefully and keep you updated on what’s going on.

In the meantime, please let us know if you have any questions or concerns.  We are always here for you.  Have a great month!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” The Wall Street Journal, March 10, 2023.  https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522

² “Silicon Valley Bank Fails After Run by Venture Capital Customers,” The NY Times, March 10, 2023.  https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html

³ “Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated,” CNBC, March 7, 2023.  https://www.cnbc.com/2023/03/07/fed-chair-powell-says-interest-rates-are-likely-to-be-higher-than-previously-anticipated.html

Inflation Worries Resurface…but Stocks Show Resilience

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

Napoleon.  Franco.  Julius Caesar.  History is filled with examples of generals who became dictators.  But there’s one shining example of a general who didn’t, and we celebrate his birthday every February.

We’re referring, of course, to George Washington.

Future historians would have hardly batted an eye had Washington proclaimed himself king after defeating the British.  Nor would they have been surprised if, after being elected president, he simply kept the office for life.

But Washington was not that type of man.

The Newburgh Conspiracy

March, 1783.  The fate of the future United States hung in the balance, though few probably realized it at the time.  That’s because a conspiracy was in the works – a conspiracy, some historians believe, that would have led to a revolt against the government if left unchecked.¹

It’s not hard to understand why.  Despite numerous promises from Congress, the Continental Army had not been paid in months, A few days before, an anonymous letter began circulating among the officers, announcing a meeting to discuss all the ways they’d been wronged.  Then, a second, much more serious letter appeared.  The Army, the letter said, should officially condemn Congress for their inaction.

Whispers began to flit through the camp.  Perhaps condemning was not enough.  Perhaps the Army should turn away from the British and refuse to fight altogether.   Others went further.  Perhaps the real enemy was in Philadelphia.  Perhaps the Army should go there – and seize the government.

There’s no question the whispers reached Washington’s ears.  It’s impossible to know if he was tempted, even for a moment.  Could anyone blame him if he seized power for himself?  It had been done before.  It would be done again.

But instead, Washington sat down to write a message of his own.

A fateful meeting

On March 15, the officers assembled for a meeting in Newburgh, New York – and found Washington there to preside over it.  They were surprised.  Some thought Washington actually agreed with the anonymous letter, since he had not officially canceled the meeting.  Most thought, at the very least, that he was unlikely to attend.

But attend he did.

In an instant, Washington could tell the situation was serious.  His officers’ faces showed that plainly, as many failed to show the respect they usually did for their commander.  Undeterred, Washington read the remarks he’d written in the days before.  The Army should be patient, he urged, and avoid doing anything that caused discord.

“Let me entreat you, gentlemen, on your part, not to take any measures, which viewed in the calm light of reason, will lessen the dignity, and sully the glory you have hitherto maintained; let me request you to rely on the plighted faith of your country, and place a full confidence in the purity of the intentions of Congress.”¹

The officers were unmoved.  They expected this.  In fact, one of the anonymous letters had predicted Washington would preach “moderation and forbearance.”²

Seeing their stony faces, Washington moved onto Plan B.  He produced a letter from his breast pocket.  The letter was from a Congressman, but just as Washington was about to read, he hesitated.

For a long moment, Washington stared at the letter, unspeaking. The officers looked at each other.  Then, slowly, Washington produced something else from his pocket, fumbling at it with trembling fingers.

It was a pair of eyeglasses.

“Gentlemen,” Washington said, “you must pardon me, for I have grown not only gray but blind in the service of my country.”³

The officers were stunned.  They had never seen Washington wear glasses before, nor admit to any disability.  One by one, they bit their lips.  Lowered their heads.  And began to weep.

Washington, they realized, had worked as much, struggled as much, and suffered as much as any of them.  Yet he would not condemn or overthrow Congress.  He would not seize power for himself.  He would not destroy this experiment in liberty, only scarcely begun.

And so, the officers voted – to express “unshakeable” confidence in Congress and loyalty to their country.  The conspiracy was over, and the nation saved, all because of a man who would not be king.

This Presidents’ Day, we hope we can take a few minutes to ponder our country and the life of the man who fathered it.  We hope we can remember George Washington.

Happy Presidents’ Day!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “Washington puts an end to the Newburgh Conspiracy,” History.com, December 13, 2009.  https://www.history.com/this-day-in-history/washington-puts-an-end-to-the-newburgh-conspiracy

² “George Washington’s Tear-Jerker,” New York Times, February 14, 2010.  https://www.nytimes.com/2010/02/15/opinion/15miller.html

³ “Newburgh Conspiracy,” Wikipedia, https://en.wikipedia.org/wiki/Newburgh_Conspiracy

Tactical Rules Neutral…Trend Indicators Improving

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

Recession Risks Rising

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

What Does ’23 Hold for Stocks? A Conversation with Global Equity CIO Adam Grossman, CFA

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

If there’s one thing we’ve learned over the years as a financial advisor, it’s that it’s never too late to dream a new dream…or achieve one, either.

Recently, we read a story that proved just how true this is.  Allow us to introduce you to a man named Manfred Steiner.

Back in late 2020, Steiner earned a Ph.D. from Brown University in physics.  As you know, graduating from college is a great achievement.  Graduating from an Ivy League school, even more so.  Earning a Ph.D. in one of the most difficult and complicated subjects known to man?  That’s just staggering.

But none of that is what makes Steiner’s story so noteworthy.  What’s noteworthy is that he did it all at the age of 89.

You read that right.  A Ph.D. in physics at 89 years old!!!  (That sentence probably deserves a few extra exclamation marks.)

When Steiner was young, he dreamed of being a physicist.  But his family urged him to be a doctor instead, so he earned his medical degree and became a hematologist.  He even served as the Head of Hematology at Brown’s medical school.

Steiner’s career was long and fruitful, and like many people, he decided to cash in his chips and retire at age 70.  Thankfully for him, and for the world, Steiner understood that retirement isn’t the end of a journey.  It’s the start of one.

More specifically, retirement is a chance not only to do what you’ve always wanted to do but be what you’ve always wanted to be.  And Steiner still wanted to be a physicist.  So, he set about becoming one.  It was a lifelong goal, and he still had a long life to live.  Back to Brown he went, taking one or two classes each semester.  (Because, hey, retirement is also about relaxing.)

In a few years, he earned his bachelor’s degree – but he wasn’t finished.  As he puts it, “I thought, ‘Why not continue now? I might as well get a Ph.D.  It’s always been my dream.  I wanted this.’”¹

So, he kept taking classes.  Kept reading books.  Kept doing homework.  Kept writing papers.  Kept passing tests.  (No word on whether he availed himself of the other joys of college life – we suspect he was too busy.)  Slowly but surely, he mastered the science of physics.  Until, finally, nineteen years after retirement, he wrote his dissertation on “Corrections to the Geometrical Interpretation of Bosonization”. ¹

We confess, we don’t know what that means – but it was the final step in earning his PhD.  (A dissertation, by the way, is more than just a simple essay or research paper.  It’s an original work that “contributes knowledge, theory, or methods to a field of study”.  Meaning that, in years to come, other students may well study Steiner’s writings to increase their own knowledge!)

In some ways, we think that’s the coolest thing of all: That no matter how old you are, you can not only achieve your goals, but can also add to the collective knowledge of the world.

“I was elated,” Steiner said after receiving the honor.  “I mean, I made it!  I really made it.” ¹

So, what is the world’s newest octogenarian physicist going to do now?

Simple: Do physics!

As Steiner says, “I’ve reached what I’ve always wanted.  Now, I want to do it.  I know I’m going to be 90 soon, but physics is what interests me, and this is what I want to end my life with.” ¹

***

Every January, many of us set new goals and make new resolutions.  Some people question the point of this endeavor.  After all, not everyone succeeds in what they want.  But whether we’ve tried something and failed…

Or if we once had a goal but were forced to put it aside for other concerns…

Or if we simply didn’t dare to dream at all, because the star we sought seemed too far away…

It is never too late to start.  It is never too late to dream.  And it is never too late to do. 

Manfred Steiner proves it.

So, as we enter a New Year, go and dream that dream no matter what it is or where you are in life.  There’s no doubt in our minds you’ll achieve it.  After all, why not?

It’s just physics.

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “89-year-old retiree earns Ph.D. in physics from Ivy League school,” CBS News, November 22, 2021.  https://www.cbsnews.com/news/manfred-steiner-89-retiree-physics-phd-ivy-league-school/

² “Dissertation vs Thesis: Key Differences,” Wordvice, https://blog.wordvice.com/dissertation-versus-thesis-key-differences-3/

Summary 2023 Outlook: A Market in Transition

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

When we were kids, we used to focus on what we would get every Christmas.  What presents would we open on Christmas morning?  What surprises would we find in our stocking?  What items would Santa actually deliver from our list?  Had we been good enough that year?

As we got older and started families of our own, our focus began to change.  Instead of looking forward to what we would get on Christmas, we started taking more pleasure in what we could give.  The real joy, we found, was seeing the expressions on our loved ones’ faces as they opened their gifts and saw what we had lovingly made or bought for them.

We think this is a very natural progression.  Most people, we imagine, go through the same transition as they grow up.  The pleasure of getting replaced by the joy of giving. 

Over the years, however, we’ve found that giving is about more than just buying the latest gadget or putting something special in a box.  We’ve found that the real joy of Christmas is in showing and sharing our love to and with the people around us.  Family, friends, neighbors, our team, our clients…all the little things we can do, and all the little things they do for us, is what really makes Christmas special.  Sometimes that little thing might be a gift; other times, it might be a service.  Sometimes it might be a kind word; other times, a shared activity or time-honored tradition.  Either way, with each passing year, giving around Christmastime has become what we look forward to most as getting recedes into the background.

Recently, a friend shared a story with us that we think illustrates this feeling.  It’s an old folk story, one of the many collected and published by the Brothers Grimm back in the 1800s.  Unlike some of their stories, this one is not a dark, cautionary tale, but a light and cheerful one. It’s a simple fable that perfectly encapsulates the warmth and spirit of Christmas.  We hope you enjoy reading it as much as we did.

The Elves and the Shoemaker

There was once a shoemaker, who worked very hard and was very honest, but as times were hard, he could not earn enough to live upon.  Despite his efforts, at last, all he had in the world was gone, save just leather enough to make one final pair of shoes.

Then he cut his leather out, all ready to make up the next day, meaning to rise early in the morning to his work. His conscience was clear and his heart light amidst all his troubles; so, he went peaceably to bed, left all his cares, and soon fell asleep. In the morning he sat himself down to his work, when, to his great wonder, there stood the shoes already made upon the table. The good man knew not what to say or think at such an odd thing happening. He looked at the workmanship; there was not one false stitch in the whole job.  All was so neat and true that it was quite a masterpiece.

The same day a customer came in, and the shoes suited him so well that he willingly paid a price higher than usual for them; and the poor shoemaker, with the money, bought leather enough to make two pairs more. In the evening he cut out the work, and went to bed early, that he might get up and begin betimes next day; but he was saved all the trouble, for when he got up in the morning the work was done ready to his hand. Soon in came buyers who paid him handsomely for his goods, so that he bought leather enough for four pair more. He cut out the work again overnight and found it done in the morning, as before; and so it went on for some time: what was got ready in the evening was always done by daybreak, and the good man soon became thriving and well-off again.

One evening, about Christmas-time, as he and his wife were sitting around the fire chatting, he said to her, “I should like to sit up and watch tonight, that we may see who it is that comes and does my work for me.” The wife liked the thought, so they left a light burning, and hid themselves in a corner of the room and watched what would happen.

As soon as it was midnight, there crept in two little naked elves.  They sat themselves upon the shoemaker’s bench, took all the work that was cut out, and began to ply with their little fingers, stitching, rapping, and tapping away at such a rate, that the shoemaker could not take his eyes off them. And on they went, till the job was quite done, and the shoes stood ready for use upon the table. This was long before daybreak, and then they bustled away as quick as lightning.

The next day the wife said to the shoemaker, “These little elves have made us rich, and we ought to be thankful to them, and do them a good turn if we can. I am quite sorry to see them run about as they do, for they have nothing upon their backs to keep off the cold, and it is nearly Christmas. I’ll tell you what, I will make each of them a shirt, and a coat and waistcoat, and a pair of pantaloons into the bargain, while you make each of them a little pair of shoes.”

The thought pleased the good cobbler very much; and one evening, when all the things were ready, they laid them on the table, instead of the work that they used to cut out, and then went and hid themselves, to watch what the little elves would do.

About midnight in they came, dancing and skipping, hopped round the room, and then went to sit down to their work as usual; but when they saw the clothes lying for them, they laughed and cried and danced, and seemed mightily delighted.

Then they dressed themselves in the twinkling of an eye, and danced and capered and sprang about, as merry as could be; till at last they danced out at the door, and away over the green.

The good couple saw them no more; but everything went well with them from that time forward, as long as they lived.

We love this story and all its characters, who think only of giving, never getting – and in doing so, get more than they could have ever hoped.  And we love this season and all the feelings that come with it!  So, on behalf of everyone here at Hudock Capital Group, we wish you a very Merry Christmas and a Happy New Year.  May your holidays be as magical as the shoemaker’s, filled with goodwill and good cheer.

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

Tactical Rules Restrain the Rally

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.