Weekly Macro Minute

GuideStone Reflections

For those of you who were baptized into Christ have been clothed with Christ. There is no Jew or Greek, slave or free, male and female; since you are all one in Christ Jesus.

Galatians 3:27-28, CSB

With this verse, Paul cuts to the core of how we tend to define identity and self-worth: sex (“male or female”), race (“Jew or Greek”), and socio-economic status (“slave or free”). These basic things have divided humanity since Adam and Eve got kicked out of the garden. For much of our history, humans have created a grid using three criteria and ranked each other (and themselves) accordingly to determine who is “okay” and who is not.

But Paul says that Jesus didn’t come merely to reshuffle everybody on the grid. He blew the whole thing up and made an entirely new system. Instead of a grid, Jesus created a circle that includes people from all walks of life, regardless of sex, status, or race. The only way one gets into the circle is by faith in Christ, not from their own merit. Our distinctions still exist, but instead of being a source of division, they are a source of tremendous variety in the body of Christ.

Our identity – our “okayness” – is now derived from being in Christ and counted as adopted sons and daughters of God. Our self-worth is not based on what we have achieved but on the grace we have received. We are God’s children, and that can’t change. We are free to use the talents, gifts, and abilities that he has given us to live like his children, knowing that we are loved and valued by Him, regardless of how the rest of the world measures us.

Across the Markets

Markets were rocked in what was a data-intensive and volatile week. Global stocks were down approximately -3.5%, while the S&P 500® fell by -1.5% – touching an intraday low on Friday not seen since January 5 – and crossed below both its 100-day and 200-day moving averages. Growth stocks showed relative strength as value names slipped into negative territory for the YTD period. Large caps outperformed small caps in this environment. Financials led the decline with the FDIC takeover of Silicon Valley Bank (SVB), unnerving investors in all spectrums of exposure to capital markets players. (Please see the special section below for more on the SVB failure.) Markets began their slide on Tuesday with Federal Reserve Chairman Powell testifying before Congress and stating that policymakers were prepared to speed up the pace of tightening and hike to higher highs if inflation maintains its current strength. WTI oil ended at just under $75/bbl, roughly where it has averaged this year.

Bond markets showed extreme volatility as well. The yield curve downshifted materially, with all maturities' yields falling in a flight to safety. The benchmark 10-Year U.S. Treasury fell by a massive 27 basis points to 2.70%. The U.S. dollar exhibited quite a bit of volatility but was essentially flat week-over-week.

In typical cadence, European stock markets moved in lockstep with global stock weakness and were not helped by a continued weakening eurozone economy and consumer. Chinese equities also gave up gains, with stocks now in negative territory for the year (a spectacular fall from strong double-digit gains seen just weeks ago), coinciding with Xi Jinping's election to a third term. Japanese markets bucked the trend and made modest positive gains as the Bank of Japan left its accommodative monetary policy unchanged.

In the Economy

ADP payroll data was released on Wednesday, showing that private sector employment surprised to the upside, while JOLTS data highlighted that job openings missed expectations as fewer people than expected quit voluntarily. Weekly unemployment claims, reported on Thursday, hit their highest level since late December. Then, on Friday, non-farm payrolls came in at 311,000, far greater than the 200,000 expected, and the unemployment rate unexpectedly rose to 3.6% (off a five-decade low of 3.4%). The combination of these data releases provided both good and bad news. It was good for Americans in that the job market remains robust, but bad for investor interpretation as a continued strong labor market fuels inflation and thereby fuels a continued hawkish Fed. The all-important Consumer Price Index (CPI) release this coming week will be the focus of market observers everywhere.

Q&A on SVB Failure

What happened?

• Silicon Valley Bank (SVB) collapsed on Friday into FDIC receivership after a bank run on its deposits. This makes SVB’s closure the second-largest bank failure in history, trailing only that of Washington Mutual, and the largest of its kind since the 2008 financial crisis.

What is Silicon Valley Bank?

• Silicon Valley Bank (SVB) was a commercial bank headquartered in Santa Clara, California. SVB was a prominent lender to technology companies, counting many start-ups and venture-capital firms as clients. SVB was ranked as the 16th largest bank in the U.S., with $209 billion in assets as of year-end 2022. It is a subsidiary of SVB Financial Group, a bank holding company with diversified businesses and a member of the S&P 500® Index.

What went wrong?

• In short, rising interest rates created paper losses on SVB bond holdings. This dynamic and other factors resulted in credit rating agencies looking to downgrade the bank's credit. SVB, to stave off a potential downgrade of its credit rating, took steps to sell some securities and raise equity capital sufficient to cover the losses. However, this backfired when the stock plunged after news broke on Wednesday that SVB had sold a large chunk of securities, worth $21 billion at the time of sale, at a loss of about $1.8 billion after-tax. News of the losses and a credit rating downgrade sent SVB Financial Group stock significantly lower on Thursday, and the potential equity raise fell through. A run on the bank took hold, with depositors seeking to get all of their money out as soon as possible, which led to the bank being insolvent by Friday morning and entering into FDIC receivership.

Is this same situation likely to impact other banks?

• Some smaller/regional banks have been under stress due to similar situations, but we believe this is much more of an idiosyncratic and anomalous event. Furthermore, regulators are likely to take this opportunity to get ahead of potential other future bank failures. The banking industry is quite healthy, especially given the regulations put in place post the 2008 financial crisis.

What’s next for SVB?

• We believe the regulatory agencies understand the seriousness of this issue and will come up with a timely solution, likely over the weekend or early next week. Of first importance, FDIC will ensure all insured depositors have full access to their insured deposits by Monday morning. This, however, is just a small portion of the assets. According to the FDIC, 89% of the bank’s $175 billion of deposits were uninsured at the end of 2022, and their fate remains undetermined. A solution will likely be found, and right now, U.S. regulators are seeking buyers for the remnants of SVB Financial Group. This includes a sprawling commercial banking operation, a wealth unit, an investment bank and a fund manager. However, it’s unclear if any buyer will buy these assets without SVB Financial having to file for bankruptcy first. On Friday, credit rating agency S&P Global Ratings said it expected SVB Financial to enter bankruptcy because of its liabilities.

How are GuideStone Funds impacted?

• As an index constituent, SVB stock is held in the Equity Index Fund, Growth Equity Index Fund and Value Equity Index Fund. In all three Funds, it was held at less than a 1% weight before the collapse and now stands at roughly one to two basis points of exposure. Among the active Select Funds, the Growth Equity Fund was the only GuideStone Fund that held a long position in SVB, with the stock accounting for less than 25 basis points of the Fund as of the end of February. As of Friday, this position now accounted for approximately one basis point of the Fund. In short, the Fund complex has a rounding error of exposure. While it is a drag in performance, like any stock that goes down, its minimal weight is not a cause for undue concern. There are no additional linkages to the stock that could create further negative effects.

What does this mean for markets and investor portfolios?

• While this particular event was unforeseen, it is consistent with our belief that the Federal Reserve’s rate-raising activity would cause unexpected stresses in the financial markets. We remain convinced that the Fed will likely hike rates to reign in inflation “until something breaks.” Fortunately, we do not view this as a systemic risk to the financial system. The clients holding deposits in this bank were unique, e.g., start-ups and risky tech companies, and not representative of the health of the broader banking system. Secondly, the Federal Reserve will prioritize functioning capital markets over its objectives of stable prices and full employment. Therefore, we are confident that the Federal Reserve will not let an event like this “get out of hand.” That does not mean, however, that markets will not be skittish/volatile due to these types of events. Further losses on equity markets are likely over the coming months as an economic recession and the hit to corporate earnings gets more fully priced in (our base case).

What are we monitoring?

• As always, our role as a Portfolio Management team is to stay abreast of current market happenings and seek to react as necessary to a constant tide of evolving events. Our priorities will be to monitor the knock-on liquidity effects across capital markets and remain in contact with our managers to gather insight from their respective vantage points.

Should investors make changes to their investments?

• We believe investors should maintain their strategic investment approach and not attempt to time the market. In times like these, we are reminded of the importance of staying invested.