{"id":12351,"date":"2023-03-27T14:00:31","date_gmt":"2023-03-27T14:00:31","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12351"},"modified":"2023-03-27T14:00:31","modified_gmt":"2023-03-27T14:00:31","slug":"has-the-likelihood-of-a-recession-gone-up","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/has-the-likelihood-of-a-recession-gone-up\/","title":{"rendered":"Has the Likelihood of a Recession Gone Up?<\/strong>"},"content":{"rendered":"\n

Chase K. from Reno, NV asks: <\/em>Hello Mitch, I\u2019m sure many of your readers are worried that the banking crisis could unravel into a full-on financial crisis, akin to what we saw in 2008. Most of the commentary I\u2019ve read says that the likelihood of a recession has now gone way up, which makes the whole situation feel like a ticking time bomb. Would love to hear your thoughts, thank you.<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for writing. There are two questions here, the first regarding the possibility of a financial crisis and the second regarding the economic recession. I\u2019ll break my response up into two parts.<\/p>\n\n\n\n

The first part is regarding a full-on financial crisis, which I see as a very unlikely possibility. The Silicon Valley Bank (SIVB) and Signature Bank New York (SBNY) failures have been billed as the second and third-largest bank failures ever, but that\u2019s a misleading characterization, in my view. When you scale the size of the bank failures relative to the U.S. GDP and adjust for inflation, you find that other bank failures in history were much bigger.1<\/sup><\/p>\n\n\n\n

See Why You Should Avoid Market Timing During a Financial Crisis<\/a><\/u><\/strong><\/p>\n\n\n\n

Far too often, investors fall into the trap of trying to buy \u201cat just the right time,\u201d or selling stocks in the midst of a financial crisis when emotions are running high.<\/p>\n\n\n\n

There is one big problem with market timing \u2014 study after study shows that the average investor is a poor market timer. In many cases, investors allow emotions and media noise to get the best of them, selling in and out of the market at the wrong times.

Our guide, \u201cHow Market Timing Can Affect Your Retirement Plan1<\/sup>\u201d seeks to explain these behavioral traps and offers potential solutions. If you have $500,000 or more to invest and want to learn how you may be able to avoid these mistakes today, click on the link below to get your free copy:
\u00a0
Download Zacks Guide, \u201cHow Market Timing Can Affect Your Retirement Plan.\u201d2<\/sup><\/a><\/u><\/strong><\/p>\n\n\n\n

The other important characteristic of these two bank failures is that both banks were in unique risk positions, with SIVB catering to VC\/tech clients and Signature Bank having 20% of its depositors in the cryptocurrency industry \u2013 both of which suffered greatly in 2022. By the end of last year, both banks had 90+% of deposits uninsured, and neither had taken any steps to manage interest rate risk on their fixed-rate investment securities on balance sheets. Both banks were largely in a league of their own.<\/p>\n\n\n\n

Looking outside of these failures in the broad U.S. banking system, I do not think it is an exaggeration to state that the system is extremely<\/em> well-capitalized. Tier 1 capital ratios are well above average (see chart below), and loan-to-deposit ratios are at their lowest levels in 50+ years. By our assessment, almost every major bank can meet withdrawal requests without having to make sales in their fixed-rate securities portfolios, which has become even more apparent as deposits have flowed from regional banks to larger ones. In short, while confidence in regional banks remains tenuous, and could result in more volatility in that space and perhaps even more failures, I think the risk of a broader financial contagion is very, very low.<\/p>\n\n\n\n

Tier 1 Bank Capital as a % of Risk Assets<\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

The recession question is an interesting one. In the wake of the regional bank crisis, there have been more calls for regulation, which I think could drive some uncertainty in the markets and also arguably put more banks into \u2018risk averse\u2019 mode. Smaller banks may also respond to this environment by deciding that a dollar in reserves is better than a dollar leant, which could reverberate into a slowdown in loan activity. The 25 biggest banks account for approximately 60% of all outstanding loans, which of course means smaller banks make up the remaining 40%. Smaller banks also account for 67% of commercial real estate lending, according to the Federal Reserve, which could mean capital for new projects could be restrained.4<\/sup><\/p>\n\n\n\n

On the other hand, the jobs market remains strong today, and the impact of higher rates on banks\u2019 investment securities portfolios is putting future rate hikes into question. My guess is that the Fed will be thinking hard about a \u2018pause\u2019 perhaps sooner than expected, which would lower the possibility of overtightening and triggering a recession in the process. My general view here is that the fresh wave of pessimism that has come from the SIVB and SBNY failures has pretty dramatically set up the U.S. economy to surprise to the upside since just about everyone is recalibrating their expectations for recession.<\/p>\n\n\n\n

During this time of uncertainty, I would suggest that investors avoid the urge to give in to market timing. Instead, focus on the long-term view and stick to your course!
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Our guide, How Market Timing Can Affect Your Retirement Plan5<\/sup><\/a><\/strong><\/em>, seeks to explain emotional and behavioral traps that investors can fall prey to and offers potential solutions to common mistakes that many self-managed investors make.
\u00a0
If you have $500,000 or more to invest, and want to learn how you may be able to avoid these mistakes today, get your free copy by clicking on the link below:<\/p>\n","protected":false},"excerpt":{"rendered":"

Mitch takes a look at the shift in banking \u2013 what\u2019s ahead?<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-12351","post","type-post","status-publish","format-standard","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12351","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12351"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12351\/revisions"}],"predecessor-version":[{"id":12354,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12351\/revisions\/12354"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12351"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12351"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12351"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}