Brace yourselves, the worst may be yet to come. Recently, state regulators closed New York-based Signature Bank, making it the second-largest bank that collapsed in U.S. history behind Washington Mutual. This is also the third bank that collapsed since Silvergate Capital – which served as one of the main banks for the crypto industry. These recent collapses have sent shockwaves in the banking sector. The S&P 500 Financials (Sector) dropped 10.72% from its opening during the announcement of Silvergate Capital’s closure of its banks on March 7, 2023.
Not only that, one of the largest financial institutions in the world, Credit Suisse, was on the brink of collapse- only to have been rescued by the Swiss National Bank – thanks to a ~ $54 billion (50 billion Swiss Francs) credit facility secured against highly valuable assets. While the bank, for now, is likely in a secure position, investors don’t want to read these headlines.
With the continuous worry of investors about the contagion from the Silicon Valley Bank, some sectors have benefited from hopes the Federal Reserve could ease up on interest rate hikes. This tells investors that even with the financial sector getting battered by the recent events and this might even grow worse, there can still be opportunities in other sectors considered to be defensive and can help weather the storm.
Looking into the past
These series of events that are unfolding are giving the majority of investors signals to run for safety. However, investors should always remember the adage “History is bound to repeat itself”. Where an investor can look at the cause and effect of one of the most devastating events in financial history which is the 2008 financial crisis. This can give clues to how investors behave during those times and which sectors thrived during these turbulent times. One of the most essential qualities of a successful investor is to be able to spot opportunities regardless if it’s a bull run or a financial crisis. Now let’s look at some industries that were resilient during any financial crisis.
The healthcare sector tends to be less sensitive to economic downturns, as people will require medical attention regardless of the state of the economy. Even though during the financial crisis, all sectors were generally affected due to the impact on jobs and household income. The healthcare sector will need to operate with the population having an ongoing need for medical care. Yesterday, the S&P 500 Healthcare index was still able to close at 0.9% even with the massive decline in the Financial Sector. The sector index chart shows that it is still in a bearish trend by trading below its long-term 200-day MA (blue) and a recent cross of its short-term 50-day MA (red) and 100-day MA (green).
Consumer staples, such as food, household products, and personal care items tend to be less prone to economic downturns. This comes from people still needing to purchase these items regardless of their financial situation. Consumers mainly maintain their consumption focused on basic needs in times of financial hardship. Even during the pandemic, Consumer Staples are also one of the sectors that fared the best during the start of the Covid-19 crisis. Yesterday the sector still managed to close at 0.47% and traded below its 50-, 100- and 200-day moving averages. All indicators are not yet showing some signs of recovery even before the announcements of the collapse.
The technology sector was also not immune to the financial crisis and was able to weather the effects of the credit crunch better than other industries. One of the key things to note is that the Technology sector was one of the sectors that recovered quickly from the financial crisis as companies in this sector tend to have stronger balance sheets and lower debt during those times. The sector has learned a lot from the dot-com crash in the early 2000s which made them operate their business more efficiently. The sector is also involved with companies that are constantly working on technology that affects customers’ way of life and businesses. This continuous integration of technology into consumers’ daily lives was a recipe for a faster recovery. Yesterday the sector index closed 0.55% and is still trading above its 50, 100, and 200-day moving averages. It managed to touch its 50-day moving average yesterday but bounced back. The main question now is if this short-term trend from the start of the year is going to be sustainable with the rise of the current crisis or if this will change the narrative for the sector.
The 2008 banking crisis taught investors valuable lessons about the risks and opportunities during economic uncertainty. Being defensive and focusing on sectors that historically have weathered similar times can give investors a blueprint of what to expect and how to navigate the looming crisis. Sectors like healthcare, consumer staples, and technology offer various degrees of safety and opportunities but also pose risks. Investors should still focus on companies that have a proven track record in the industry and have a strong history of stability and growth lessens the amount of risk any investor would take. Capital preservation is always the main priority of any investor. The banking collapses continue to happen. In times like this, I always look back to a quote I once read, “Risk happens slowly, then all at once”.