The S-fund lost nearly 6% in the final two days of the week, but it wasn't the February Jobs Report that ran off investors. Coming into the week we had two major events on our minds: 1) Jerome Powell would be testifying on Capitol Hill about the path the Federal Reserve was on to lower inflation, and 2) the February Jobs report that would be a follow-up of the January Report that surprised everyone, worried investors that the Fed would need to raise rates more aggressively, and started the meltdown of the January gains.
But there was a third main event that was not on anybody's schedule. Silicon Vally Bank (SVB) failed to liquify enough to cover cash withdrawals and regulators were forced to step in. This was the largest failure by a U.S. lender in more than a decade, and it was a consequence of the unprecedented higher rates propelled by the Federal Reserve.
SVB and other banks invest in bonds as a major asset, but the value of those bonds have deteriorated at an unprecedented rate as the Federal Reserve's rate hikes drove up yields thus dragging bond prices down. This would not be a problem if the bank held these bonds to maturity but as worried customers withdrew deposits at a faster rate the bank was forced to liquidate with substantial realized losses. The bank eventually held less assets than they owed and were forced to close their doors.
The major question now is whether this problem at SVB is contained or contagious to other banks. Banks across the country are currently holding hundreds of billions of unrealized losses but have yet been forced to liquidate. This especially a problem for smaller banks whose customers will likely withdraw deposits to secure them in large banks on fears of being the last to do so.
The February Jobs report was not a repeat of the January report but still came in stronger than expected. The consistent jobs additions does take the pressure off wage growth which is a driving force in inflation. While there seems to be large pitfalls in the economy, like in tech and tech start ups, there are also pockets of strength keeping the economic numbers uplifted. But I would expect another round of tech layoffs in the coming months.
As for the Federal Reserve, they now have to decide between their primary goal of lowering inflation and protecting more small banks from having the same fate as SVB. This coming Tuesday the Consumer Price Index, which will be the latest report card on inflation, may be a deciding factor for the Fed's priorities in its March 22nd FOMC meeting. The current Fed rate probabilities have a 68% chance of the Fed raising rates by 0.5%, this is up from a 28% chance the week prior. The probability of a 0.25% rate hike has dropped proportionally. Personally I would have expected it to go the other direction but maybe there is reason to believe the SVB incident is less impactful as it seems.
All of a sudden the I-fund has taken the position of best 2023 return among the TSP funds. The 8.16% loss in the S-fund this week dropped its 2023 return down to 2.11%. The C-fund is worst off for the year with a gain under 1% for 2023, yet only suffered a 4.53% loss this week in comparison.
Bond prices spiked on Friday as investors ran to safety on the SVB news. The F-fund gained 1.17% for the week; 1.16% of that gain came on Friday.
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Here are the weekly, monthly, and annual TSP fund returns for the week ending March 10:
SPY (C-fund) started the week with some gains intraday Monday after climbing back above its moving averages the previous week. The good times would be short-lived. The ETF peak mid-Monday and began a decline that would only accelerate late in the week. Back below its major moving averages, the C-fund finished Friday at its lowest close since January 4th. The C-fund lost 4.53% in week dragging its 2023 return to a 0.90% gain which lags the F-fund and is just 0.17% higher than the G-fund return.
DWCPF (S-fund) suffered a similar but higher magnitude of losses this week. Falling out of a declining trading channel, the index price plummeted nearly 6% between Thursday and Friday and dropped the index down to its lowest price since January 9th. The S-fund fell 8.16% for the week. The 2023 return for the S-fund is down to 2.11% giving up the top return among the TSP funds.
EFA (I-fund) was no place to hide this week, but the ETF did protect a significant amount of capital compared to the S-fund. The ETF dropped below its 50-day EMA Friday. The I-fund lost 2.27% for the week, keeping its 2023 return to 4.89% to claim the best return among the TSP funds.
BND (F-fund) traded back and forth through the week and eventually ended the Thursday with a near even return of 0.01%. Although when he SVB news hit the market many participants ran to the safety of bonds expecting the the worst in higher risk equites. That drove the price of the F-fund up 1.16% on the day giving it a 1.17% gain for the week. The F-fund now carries a higher 2023 return than the C-fund at 1.62%.
Good luck and thanks for reading. We will be back here next week with another TSP Wrap Up. You can read our daily market commentary at the Market Comments page. If you need more help deciding what to do with your account, perhaps one of our Premium Services can help.
Thomas A Crowley
wwww.tsptalk.com
Last Look Report
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