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Silicon Valley Bank Collapse and the Implications

| March 14, 2023



Silicon Valley Bank Collapse

In the latest LPL Market Signals podcast, Chief Equity Strategist Jeffrey Buchbinder and Chief Global Strategist Quincy Krosby discussed implications of the Silicon Valley Bank (SVB) collapse, assessed the risk of contagion, compared this situation to 2008, and reviewed the team’s latest asset allocation views.

The failure of SVB was caused by several unique factors: 1) the bank’s focus on venture capital funded startups, 2) the mismanagement of the interest rate sensitivity on the bank’s balance sheet, and 3) the run on the bank caused by public venture capital community concerns about the bank’s health.

In response to the bank’s collapse, on Sunday the Federal Reserve (Fed) and U.S. Treasury stepped in to backstop depositors. Regional bank shares were under heavy pressure on Monday as some speculated about potential runs on other banks. That risk cannot be completely discounted, but the Fed’s emergency lending program helps limit contagion risk.

The strategists discussed potential opportunities that may be present following SVB’s collapse. LPL Research’s asset allocation committee believes financials-heavy preferred securities are worth considering following the latest downdraft, but is waiting to see approach to bank stocks.

Regarding the comparison to 2008, the strategists noted that the problem for banks this time is interest rate risk, not credit risk. Rising interest rates caused the value of the bonds on SVB’s balance sheet to lose value, which, along with fleeing deposits, caused the bank to fall short of necessary capital levels.

Finally, the strategists reviewed LPL Research’s recommended asset allocation for equities and previewed the data for the week ahead, including the consumer and producer price indexes.

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

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The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

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