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The fact that the US government acted quickly and in a coordinated fashion gives me a degree of comfort that today’s problematic situation regarding US banks may be reasonably contained. At the root of all financial crises is a widespread loss of confidence. We don’t seem to be at that juncture yet.

However, a lesson learned during the 2008 financial crisis was that it is hard to know what comes next and when the danger has passed.

We are in a period of high uncertainty now where systemic weakness has come to the fore and many banks may be in precarious positions. If losses mount at other banks because of poor risk management practices, regulators may need to do more.

The good news is that regulators understand how to fix liquidity crises at banks. They have a Global Financial Crisis Playbook from 2008 and a Pandemic Crisis Playbook from 2020 as reference guides, along with a willingness to use them.

Fast-acting and knowledgeable regulators can help boost confidence when cracks in the financial system appear.

Also, the US economic machine continues to drive forward.  Jobs are plentiful, wages are growing, and the consumer is spending. While a downshift in the economy is possible, and perhaps even likely, there seems to be enough momentum and resiliency to maintain growth in 2023.

And interest rate increases, which have put pressure on stock and bond prices, may soon be viewed as ‘yesterday’s policy’ by the Federal Reserve. Policy makers meet next on March 21-22 to decide on the direction of interest rates.

While it’s not a foregone conclusion that they’ll change the policy path and hold off on hikes, the Federal Reserve needs to be considering this in light of last week’s developments. A lower interest rate environment would alleviate pressure and should support higher stock and bond prices. 

The bottom line for clients is that maintaining your long-term asset allocation strategy, even when it’s uncomfortable to do so, is a time-tested approach that tends to produce the most satisfactory results.

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