Looking Back on a Volatile Week

March 17, 2023

Given the volatility we saw this week in markets, largely a result of concerns around the financial stability of banks, we wanted to provide a brief update on what transpired and how we view it in terms of our client portfolios.

The following views are those of NB Private Wealth’s Investment Strategy Group (ISG). ISG leverages the broad expertise of Neuberger Berman to help develop investment solutions for U.S.-based private clients and works closely with wealth advisors, portfolio managers and clients with the goal of designing and implementing customized and diversified investment plans.

Given the volatility we saw this week in markets, largely a result of concerns around the financial stability of banks, we wanted to provide a brief update on what transpired and how we view it in terms of our client portfolios.

What Happened This Week: Markets Focus on Banks, Fed Cycle Could End Sooner

The impacts of the Silicon Valley Bank and Signature Bank failures continued to reverberate, even after regulators stepped in to assure that depositors at both banks would be fully protected. Credit Suisse, which had reported “material weakness” in its financial reporting, received a $54bn “lifeline” loan from the Swiss central bank, and a group of large U.S. banks said they would deposit $30 billion into First Republic Bank to help it avoid insolvency. Banking stresses may cause the Fed to pause its tightening campaign sooner than expected. Tuesday’s in-line February inflation print also gave the Fed flexibility to focus on financial stability concerns

Market volatility remained elevated. Broad-based equity indices were mixed on the week -- the S&P 500 Index was up 1.43%, the Dow lost -0.15%, and the Nasdaq 100 advanced 5.83% while the Stoxx Europe 600 declined -3.8%. Among S&P 500 equity sectors, Communication Services and Technology were leaders during the week (+7.0% and +5.7%, respectively), while Energy and Financials were meaningful laggards (-7.0% and -6.2%, respectively). While large caps were up 1.4% during the week, smalls caps were down over 2.6%. (Sources: Bloomberg & Factset)

Returns within the fixed income market were positive on the week with the Barclays U.S. Aggregate Bond Index up 0.6% as of Thursday’s close given the decline in rates across the yield curve with the 10-year Treasury falling 27 bps over the week. However, spreads (yields over Treasuries) for U.S. investment grade corporate bonds increased over the week as investors continued to reprice risk in light of recent events. (Source: Bloomberg)

Portfolio Positioning: Maintaining a Defensive Posture

As highlighted in our Tuesday update, we were relatively cautious coming into the year and favored defensive positioning focused on overweighting cash and cash equivalents, with a preference for higher-quality, shorter-duration assets within both fixed income and equities, even as risk assets surged out the gate. The volatility in markets over the last week only reinforces our conviction in maintaining a defensive posture. The emergency measures put into place over the weekend and the further actions taken during the week -- domestically and in Europe -- attempted to calm the market. While much uncertainty remains, the Fed is expected to limit further interest rate hikes as it balances financial stability and recession concerns alongside inflation.

Against this backdrop, we anticipate that security dispersion in both credit and equity markets will continue to increase as fundamentals and active management become key focuses for investors. The situation remains very fluid, however, and we will continue to monitor the unfolding events and adjust our positioning as needed.

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