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As of this writing, a few financial institutions have imploded as they struggled to contend with rising short-term interest rates and efforts to generate immediate liquidity. In their wake, some companies have seen their stock share prices plunge, while investors are anxious about further potential looming aftershocks in the banking sector and beyond. Chief Investment Officer Tony Roth and senior members of his team discuss what this may mean for financial conditions, credit spreads, interest rates, and portfolios.

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Economic, Market & Monetary Consequences of Bank Failures

Tony Roth, Chief Investment Officer

Meghan Shue, Head of Investment Strategy

Luke Tilley, Chief Economist

Steve Norcini, Senior Equity Portfolio Manager


Welcome to Capital Considerations. I’m Meghan Shue, Head of Investment Strategy for Wilmington Trust. On March 16, Wilmington Trust hosted a webinar, Economic, Market & Monetary Consequences of Bank Failures, moderated by our Chief Investment Officer Tony Roth.

Tony and I were joined by Chief Economist Luke Tilley and Senior Equity Portfolio Manager Steve Norcini to address potential impacts of the recent disruption in the banking sector. We discussed why a few banks proved vulnerable, our expectations for the trajectory of rate hikes and inflation, and market impacts as banks continue to face sector-wide pressure.

We hope you find the highlights from this webinar insightful. Tony will return with new episodes in the next few weeks. 

Tony Roth: We have a lot to, to cover today. It's obviously been an interesting time in the markets, for regional banks specifically, of which we are of course one.

We have a great cohort of colleagues of mine here today. Steve Norcini, who is our senior financials analyst. We have Luke Tilley, our chief economist, and we also have Meghan Shue, our head of Investment Strategy.

We want to review the state of affairs. And we have obviously experienced significant disruption. One might say something of a crisis in the regional bank arena here in the United States.

And then there's what I would refer to as a, a twin stress happening outside of the U.S., specifically in what we refer to as the global systemically important banks in Europe. And, fortunately, it has not bled into the domestic, global, systemically important banks, but it started with Credit Suisse and that's an ongoing situation.

We feel that while there is stress on certain banks here domestically, the action that the Treasury and the, and the Federal Reserve took over the weekend last week has largely addressed the crisis here in the U.S.

I'm going to start by level-setting so we all understand what in fact has actually happened, starting with Silicon Valley Bank. In fact, actually starting with a different bank named Silver Gate the prior week, spilling into Silicon Valley Bank with its own set of problems and then Signature Bank, and now continuing a little bit with some other banks. The bank collected a very extreme number of deposits relative to its history during the 2020/‘21 calendar year. What was happening there was a relatively small number of depositors compared to other banks were collecting significant amounts of capital. These depositors tended to be venture capital companies, startups, et cetera. And they deposited this cash at Silicon Valley Bank during a period where they had significant inflows.

And this was accompanied by significant investment more broadly in the technology space during the pandemic when we were all stay-at-home and we were putting a lot of our energy into various ways of interacting and living through technology. And so there was a big boom for technology startup companies and it was all reflected in one way, lots of deposits coming into this bank that supported that industry.

Then what we saw happen about 12 months ago, we started seeing a significant change in the interest rate environment. And so, what happened with these deposits when they came in, to a large degree, rather than lending these deposits out as loans as banks typically do with much of their deposits, Silicon Valley Bank instead decided to take the deposits and purchase securities that from a credit standpoint were quite safe.

These were generally securities that were Treasury securities or high-quality mortgage-backed securities that in many cases were federal agency securities.

As rates dropped into the pandemic, the value of those Treasury bonds increased, and other related bonds that I mentioned. As rates dropped bonds always go up in value, all else being equal. And so, these deposits came in, and they were deployed into these bonds as assets on the balance sheet when the bond market was elevated in value or elevated in price.

Then what happened was, of course, we moved into an inflationary environment and interest rates moved in the other direction unexpectedly interestingly, on the part of many market participants, probably the majority of market participants, um, including the regulators, quite frankly. And so, when interest rates started to move up acutely due to this unexpected surge in inflation, we saw the value of these bonds drop precipitously. Treasuries moved from approximately $125 to $135 in value, down to $85 to $95 in value.

And that represented a significant loss on the asset side of the balance sheet to the banks at least on a mark-to-market basis. The next thing that happened in the story is that these depositors decided that they started to need their money back for various reasons. One reason was, of course, in a higher interest rate environment, depositors were looking for better solutions for their cash to receive higher rates of return than what they might receive from a deposit. When interest rates were very low, depositors were not particularly concerned because there weren't a lot of good alternatives to in fact receive higher rates.

But as interest rates moved up, there have been better alternatives for certain depositors, depending on what their goals are to deploy the cash elsewhere. So that was one thing that drove activity. The other thing that drove activity is that, quite frankly, the Fed's campaign to slow economic activity and thereby tamp down demand and start to slow the overall economy and create price stability started to bite.

What we saw was that revenue from these companies, these startup companies, and business activities started to slow down. And so these startup companies, these smaller companies in general, needed that cash to fund their businesses. All of a sudden, the deposit flow reversed. All these deposits started to be withdrawn from the bank as that environment changed, as I've described. The bank, of course, had to fund those deposit withdrawals by starting to sell down these securities that it owned.

And when it did so it had to take a loss. There were actually other options available to it. It could have borrowed money from the Fed in order to pay these deposits that were being withdrawn.

The bank decided to sell a large chunk of its securities and realize about a $2 billion loss. And that was disclosed last Wednesday by the CEO in a letter to the market. And when that happened, it became, um, clear to many other depositors that the bank may be under a certain level of stress and that created a run on the bank.

And the bank couldn't handle that, of course, and the bank collapsed and was brought into receivership. Late last week and over and over the weekend, Signature bank, was closed down due to similar reasons. They had depositors that were, instead of venture capital, depositors, they were fairly concentrated depositors in the cryptocurrency space depositing cash.

And they similarly had a mismatch between their assets and, and their liabilities. And then the concern became broader that sort of swept through the regional bank space and we saw loss in equity valuations for regional banks sweep through the markets.

I wanted to just address real quickly the situation here at M& T from a safety and solvency and liquidity standpoint.

And I'm very pleased to be able to say that here at Wilmington Trust, we're in very good shape. We are a bank that has a very broad deposit base unlike Silicon Valley Bank, we're a community bank.

And on the other hand, we have relatively low numbers of securities that are mismatched to those deposits. Probably the lowest, lowest in the industry. I also wanted to be able to say specifically that it's important for clients of Wilmington Trust to know and understand that assets held by Wilmington Trust in trust and fiduciary accounts other than cash are not considered to be assets or liabilities of Wilmington Trust.

They're considered to be owned by the individuals or entities whose benefit they're held. Investment management accounts at Wilmington Trust are considered fiduciary accounts. While we provide investment management, administration, and other services to these accounts, these accounts are assets that are held for the client and they're owned by the client, not by Wilmington Trust or M&T.

And so, any outcome that may ultimately occur to M&T and Wilmington Trust would in no way impair these assets. And we'll see in a few moments, the very strong capital position that Wilmington Trust and M&T stand in today. As a unified entity, we actually have the highest capital ratio of our peer group at a, I believe the number is 10.4%.

I also wanted it to make it clear that trust and fiduciary assets are segregated from Wilmington Trust assets and are not subject to the claims of third-party creditors of Wilmington Trust and non-cash assets include, but are not limited to, balances held in mutual funds, securities, bonds, annuities, limited partnership interests, life insurance policies, et cetera. Essentially what I'm saying here, and the same applies to custody accounts. Uh, any assets that are held with us, M&T or Wilmington Trust, that are not cash assets, are segregated assets, and they're held and owned directly for and on behalf of the owner of the account and not Wilmington Trust or M&T Bank.

So that's very important to know and to understand. Now, I also wanted to very quickly address, cash accounts here at Wilmington Trust are indeed protected by FDIC up to the cap of $250,000.

I wanted to say more generally, FDIC has provided these protections of $250,000 per depositor, per institution for about a hundred years.

Coverages in excess of $250,000 are not protected today by the FDIC. The same applies to retirement accounts. And retirement accounts are also protected—IRAs, et cetera—up to $250,000 per FDIC-insured institution.

That's important to understand. Now, having said that, I will say that the actions that the Federal Reserve took are very important because what the Federal Reserve essentially did was they said that any assets that are being held by the bank to maturity, any securities, can be used as collateral in a new program that the Federal Reserve has created.

With respect to Silicon Valley Bank, they're deposit base, the percentage of accounts that were under $250,000, it's a very small percentage of accounts. That essentially means with a very concentrated deposit base, they were very much at risk of having a relatively small number of depositors create a run on the bank. In the case of Silicon Valley Bank, their average deposit level was around 4.5 million.

And here at M&T, it's much smaller. I believe it's in the range of $45,000 to $50,000 per depositor.

The percentage of assets, that Silicon Valley Bank held in securities, these longer-dated treasuries, et cetera, it was a much higher percentage than any other bank in the industry.

M&T Bank is just about the lowest in the industry in terms of the percentage of our assets that are held in these kinds of securities that have risk of depreciation due to higher interest rate environments.

And let me just say, one thing that's so interesting about this crisis compared to the global financial crisis is that the global financial crisis was similarly the crisis around the quality of assets and the value of assets on bank balance sheets and the impact it had on liquidity and, ultimately, solvency.

But in the case of the great financial crisis, the problems that we experienced with those assets were not the interest rate sensitivity of the assets, the duration of the maturity, but the credit quality of the assets because they were essentially backed by the housing market and we had a crisis in the housing market, et cetera.

Here we have the opposite problem. We have assets that have very strong credit quality, but they have significant interest rate risk. And as interest rates moved up, the value of these assets moved down and it impacted the asset side of the balance sheets of banks.

So, the government has, of course, guaranteed all the deposits, specifically of the two banks that have gone into receivership, Silicon Valley Bank and Signature Bank, but they've effectively, indirectly, backstopped the deposits of these other banks above $250,000, if you will, because  they've created this Bank Term Funding Program where they've essentially said to these banks that if you're holding these securities, these longer-dated securities, that were a big part of the problem with the mismatch of assets to liabilities that these other banks had—Silicon Valley Bank and Signature, et cetera—if you're holding them, not to sell, but to hold to maturity. We're going to allow you to post them as collateral to the Federal Reserve and we'll make a very favorable interest loan to you that you can hold for a year or up to a year at a very low interest rate. And so what that effectively does is it enables all of these various banks that may have a mismatch to assets, to liabilities, such that if they had a, a run on deposits, um, to be able to go directly to the Fed post their collateral, receive funding on that collateral as if it was worth par value, even if the market value may be lowered due an increase in interest rates.

And this is effectively stopped the run on the banks. Even to the extent that deposits are uninsured above $250,000, the likelihood today that a bank would fail on those deposits would not be made whole by The Fed or the Treasury or the FDIC, seems to be a lot lower than it might have been a week ago.

Perhaps very low as a result of the actions that the Fed and the Treasury have taken. And that's why the bank runs have stopped here domestically. That brings us to the overall situation from a historical standpoint. And now I want to talk about what it means going forward for the banking industry and the immediate crisis that we've experienced. I want to bring in Steve Norcini, our senior bank analyst, our senior financials analyst.

Welcome Steve.

Steve Norcini: Hi, Tony. Thank you.

Tony Roth: Do you feel that, as I've described, that the crisis here in the U.S. in terms of a run on these regional banks has been adequately addressed by the actions that the regulators have taken. And if the answer to that is yes, why are we continuing to see stress on the share prices of a number of these regional banks?

Steve Norcini: I do believe the answer is yes. The steps taken by regulators should be enough and if it's not, I, you know, I do have supreme confidence that whatever additional steps need to be taken, they’ll certainly deliver those steps. It's their job to keep the system running smoothly.

Bank runs are obviously not good for anyone. The guaranteeing deposits and, and offering the preferential lending against securities certainly seems to have stopped the major runs. We are still watching a handful. Very few smaller banks that seem to be a little bit out of bounds.

Really, those jumbo—greater than 250K—deposits are the ones that are most at risk for flight. There are a couple other banks out there that, that do have a concentration, that type of funding. We might get some more bad news, but as a whole, the system we're pretty comfortable.

What we may see, not crazy bank runs, but we may see some distressed acquisitions, some banks that are caught flatfooted needing to sell themselves at distressed prices. We may, possibly see some pretty dilutive equity issuances to improve liquidity and capital adequacy at some of these banks.

But the really dramatic bank runs, I do think, famous last words, I think for the most part are behind us.

Tony Roth: So, this is a really good segue, I think, Steve, into the future of these kinds of banks, regional banks, not all of them, but some of them are under stress as we can see.

Why is it, if in fact there's not going to be a run on the bank due to the backstop and we are not seeing those runs occur frankly, that the prospects for at least a subset of these regional banks, is now viewed very differently than it was a week ago? What is it about what's happened that is going to cause the earnings capacity, if you will, and the viability or the desirability of some of these business models as a going concern to be less attractive than it was perhaps a week ago?

Steve Norcini: We've had 10+ years of zero rates, very low rates, and banks in general, not everyone, certainly not M&T, got a little bit sloppy on their balance sheet management, on their interest rate risk exposure management, and then candidly on their funding base, their deposit base.

I'm a little bit cautious on these regional banks and, and smaller banks because you, they're gonna get hit a few different ways. One, and this is purely from an earnings power value of the stock perspective. This isn't from a bank run, you know, panic going concern issue. But, I think we are going to see more regulation and scrutiny on these smaller banks.

They've been given a pass since the financial crisis. The large mega-cap banks, global, systemically important banks. The GSIBs, which I think we're going to get into, they've got to meet capital adequacy and liquidity requirements. They have to go through annual stress tests. That type of scrutiny is probably going to make its way down to smaller banks, and that's going to be a whole new layer of cost. But it’s also going to be a reduction in earnings power. And to the extent they need to hold more cash, let's say, or more capital on the balance sheet, their returns will be lower. So, they're going to be fighting a few different battles at the same time.

And they're really doing it in an environment where the economy may very well be slow, slowing even, even contracting. So, it'll bet tough sledding for them, in the near to intermediate term, I think.

Tony Roth: This is not meant to be a commercial for M&T and Wilmington, but, I think that some of those models stand in very sharp contrast to the model of M&T where we've had 186 quarters, I believe the number is, of positive earnings. Our balance sheet management, I think, has been really starkly different from the banks on the other side of the continuum.

We look at our marked losses on our portfolio of securities. It’s probably the lowest in the industry. And as a community bank, we have just an incredibly broad deposit base. So, we're sort of built for the opposite. We're sort of built for a longevity and, and stability.

So having said all of that, let’s move now to Credit Suisse. We have a bank that's been troubled for some period of time. It's a bank that has had a number of capital infusions over time. One of the most recent capital infusions was from, uh, the Sovereign Wealth Fund in Saudi Arabia.

And last week there was a report, raised eyebrows for me and I was surprised not to see more action on the part of the Credit Suisse share price at first, where they came out and said that there was some material inadequacies in their financial reporting. and the stock sort of just sat there.

But thenthe most recent investor from Saudi Arabia said they weren't able to or weren't going to top off their investment in Credit Suisse. And that really started to cause real pressure on their stock price. Can you compare and contrast what's happening in Credit Suisse and then now spilling over at least to the share price of these other banks to what's happened with the regional banks in the U.S.? It does seem to be a very different sort of set of concerns and in a way, a much less specific set of concerns when you get beyond Credit Suisse, which has been a troubled bank for a long time.

Steve Norcini: Other than size and geography, the main thing about Credit Suisse is this is surprising no one.

This bank has been, I don’t know if troubled is the right word, but they've certainly been in the news for a lot of bad reasons for a number of years. A lot of high-profile losses, legal troubles, losing clients on a fairly regular basis that we saw kind of step up in Q4 in a pretty major way that's causing a lot of concerns.

And that brings a new sort of set of issues to contend with when you're investing because Credit Suisse is a global systemically important bank. It is a GSIB. That's good and bad. It's good from the extent that it's very well regulated and overseen. Regulators know what's going on.

Nothing here is really a surprise. It's trying to stop the bad thing from happening as opposed to just out of nowhere it coming. But it's bad in that because it's a GSIB, it's so connected with banking and trade around the world where if that bank were to go insolvent, that would have ramifications, sometimes referred to as contagion, to other major financial players in the market that that bank trades with on a regular basis.

And then potentially those banks get into trouble even though they've been managing fine. And then the, the sort of contagion and crisis spreads from there.

Tony Roth: What's happened with the share prices of these other banks has really been a derivative of the idea as you laid it out, Steve, that Credit Suisse is systemically important and these big, systemically important banks, of which there are, you know, less than 10 globally, about 10 globally or so, 12 maybe, if you can include the Japanese banks, et cetera.

They're all very interconnected. And then you have counterparty risk with one another. And the concern that one would fail and really have negative implications on the entire system is where the pressure on other bank share prices seems to derive from rather than inherent concern around these other banks, per se, at least at this stage.

So with the Swiss government coming in overnight and backstop and Credit Suisse with a $50 billion loan, we feel much better about this situation as one that doesn't seem to pose systemic risk to the global financial system or U.S. financial system.

So with that, I want to turn now and bring Luke into the conversation, our chief economist, and Luke, before we talk about the impact that this all has on our economic and monetary forecast, i.e., what the Fed is going to do, let's just set a baseline and remind everybody where were we a week ago before this happened, with respect to our outlook for economic growth here in the us And the fed's fight against inflation?

Luke Tilley: Inflation obviously has been a problem peaking at 9.1% last year, and it has been coming down in a year-over-year sense, and we do expect it to keep coming down.

The most recent report of inflation still shows that the services sector and some components of inflation are still sticky to the upside. So, we know it's going to be a challenge going forward. So, what we expected, is that this was still a challenge, the Fed still had more rate hikes ahead of them, and they would be guiding and looking at the data as that came in to sort of calibrate how many hikes that would need to be.

But we certainly expected more hikes forward before this issue with banking. In terms of economic growth, our baseline expectation is for a mild recession sometime later this year.

This would be similar to the economic recession that we had in 2001, which was very mild, just a couple of quarters. And the, the annual growth remained positive. And this is contingent on consumer spending and business investment taking a little bit of a step back this year in response to those high rates.

The last bit of that, Tony, this is not our forecast, but this is what was baked into the markets. We thought maybe a little higher than this, is that the Fed would be hiking to a peak of five and a half percent in the middle of this year.

And then perhaps a little bit of easing near the end of the year priced into markets. And that has changed now, which we'll talk about. But that's, that's the level setting, Tony.

Tony Roth: At this stage, we believe that the Fed probably still has work to do, given how the inflation data is coming in. We're starting to see some real improvements in certain areas of the economy, but in other areas we're still not seeing improvement.

Before we talk about how the bank crisis affects our view on where the economy is going and where the Fed is going, Luke, what are the reasons that the Fed might change its position and its approach? So, let's be very analytic about this.

Three things that can cause this pivot that the market is now pricing in.

The first is that, if we have a continuing regional or globally systemic, important bank crisis occurring, I think it's fair to say that the Fed is not going to be tone deaf to that and they're not going to raise interest rates and put further stress on banks when that's happening.

We think that right now it's probably not going to be the case. It's probably going to be something going on in the background. The Fed was going to raise 50, maybe it'll push them down at 25 to be cautious, but it's probably not going to prevent them from raising, given what we know today. So that's one thing that we can check the box on.

The second is that financial conditions as a result of this bank crisis, could have tightened significantly. So much so that the bank crisis effectively is doing the work for the Fed. So given the environment that we're seeing, regional banks and maybe even banks overall in the U.S. won't be as apt to lend because they're far more concerned about their balance sheets,

We want to move to Meghan and we'll come back to you, Luke, in a moment, to talk about the idea of the slowing economy is the Fed's action actually working. And that's what's happened in the case of Silicon Valley Bank. So they can see, as painful as it may be for those banks, they can see the positive effects of their activity.

That's the third point. We'll get to that in a moment. But the second point is this idea that financial conditions have tightened enough that the Fed can slow down. The bank crisis itself constitutes a significant tightening of financial conditions, even though interest rates are now much lower.

Meghan, can you take us through your assessment of where are financial conditions today in light of recent events and culminating in the bank crisis that we're experiencing?

Meghan Shue: Absolutely.

Clearly the Fed raises their policy rate, the fed funds rate, that's not actually how the Fed's actions, um, impact the real economy. What really matters is how that change in policy rates impacts interest rates out the curve, credit spreads, equity and fixed income market volatility, and currency movements.

So what we do is we monitor a broad swath of data to get a sense of overall financial conditions because we know that what the Fed does takes uh, effect in, in long and, and variable ways. One measure of financial conditions, we've clearly seen that it's tightened since the Fed has started raising rates in 2022, um, uh, or I'm sorry, in last year, at the end of 2022.

And we are now seeing, uh, some of that easing of financial conditions as the market was pricing in rate cuts later this year. We've seen some increase in financial conditions in terms of the tightening with the recent bank stress, increase in volatility.

But we are really nowhere near where we were in terms of aggregate financial conditions in the heart of the pandemic in 2020 or the global financial crisis in 2008. We've definitely seen volatility pick up not so much in the equity market, as measured by the, what's called the VIX, but very much so in the fixed income market.

One measure of fixed income market volatility is the, the MOVE index. It is the highest that we've seen since 2008. And I just want to briefly mention something that's kind of been also worth monitoring, which is some signs of stress in very liquid parts, um, of the market, U.S. Treasuries and German bunds, which you think of being as the safest and most liquid, uh, investments and securities. We've seen wider spreads, slower execution of trades, and really a surge in trading volumes that could potentially have impact down the line, as there's a lot of other securities and derivatives that are priced off of these.

In our view, this is really being driven by, an increase in fear, uh, around the banks and really I'd say more so, uh, concerned about a rolling over of the broader economy.

Tony Roth: The bank crisis itself is a manifestation that the Fed's activity, its campaign to tighten the economy, is working, and that we're starting to see things break and we're starting to see things slow down. What's your assessment on that and whether or not that, combined with a little tightening in financial conditions, could change the Fed's view and bring it closer to what the market is now forecasting?

Luke Tilley: The tightened financial conditions is really key because, as Meghan said, that's the channel by which the Fed's policy goes through and actually affects the economy. And we've seen that that tightening of financial conditions broadly over the course of the year and definitely a little bit over the course of the past week, the key ingredient here is the Fed's assessment of, as you said, Tony, is this going to change the behavior of banks going forward, and lenders, and also consumers and firms,  because this kind of an event can really have an impact on that behavior.

Ultimately, what the Fed is trying to do is to slow down consumer spending and also business spending and all of these loans. So, there is the possibility that the, uh, that this, this crisis by itself will have that impact in sort of channeling through to some of those financial conditions, and we would see those tighten and that will affect the Fed.

There is a lot of work here to do. We did the level set of the inflation, and saw that it was coming down, but I have to emphasize that there are parts of that inflation report, down deep when you get into the services sector that are still accelerating, and it's still a challenge.

Recreation, medical care, and, and all of those things. And it has been right at the forefront of the, uh, Federal Reserve's mind as they've been hiking rates. It'll still be at the front along with this crisis.

The real question is going forward, are they going to need to hike more? And might not need to get as high as we expected because of the, the change in financial conditions.

Tony Roth: Okay. So, thank you very much, Luke. And I just want to summarize this point. It's a very important point because it's one of the most commonly asked questions of our clients.

What will the Fed do now? And where will the economy go? Will we have a recession? And our view is that the massive change in market expectations that we've seen is really overstating the case and the harm, if you will, to the economy that this regional bank crisis has caused. We think the Fed has more work to do. Probably at least another 50 basis points.

And the base case remains a mild recession sometimes starting this year. So Meghan,

what does this mean from a positioning standpoint in your mind? We came into the year, we were already underweight risk. We've added to our underweight on risk. We're underweight small caps in the U.S. international equities partly due to the war in Ukraine, so on and so forth. We're overweight investment grade bonds, which has worked well in the environment with interest rates falling so quickly and we're slightly overweight cash.

Can you talk to us about what specifically you like right now as our head of strategy? Talk to us from a sector standpoint, which sectors you like going forward and what's your sort of highest conviction idea right now?

Meghan Shue: So what we've seen over the past few weeks is really a lot of stress in, in certain parts of the market. Clearly financials, having a very difficult last month, but really more broadly, a lot of pressure on the cyclical sectors of the market, financials, energy, real estate. The overall market doing a little bit better than some of those parts of the market that are tied a little bit more to growth in the economy. I would say what's interesting is, is not so much that the defensive sectors like health care and utilities and consumer staples have held up well, but that technology has done, uh, relatively better.

That is technically a cyclical part of the market, but it's already, uh, quite beat up. We see some attractive valuations within technology and clearly the move in interest rates. 10-year Treasury yield back below three and a half percent has been beneficial to that longer duration asset.

I mean, we find opportunities across sectors. We are a little bit more conservatively positioned when it comes to, um, some of these more cyclical sectors, particularly as they have a little bit more value exposure. You mentioned small cap, Tony, being underweight.

That's been a, a very good position, uh, over the past few weeks. There is a higher concentration of cyclical sectors, financials, energy, even real estate within that small-cap asset class. But I think what this higher interest rate and more challenging economic environment really speaks to is an emphasis on higher quality in portfolios.

And, and what do we mean by that? Well we mean, uh, really identifying and seeking out companies that have higher profitability, have steady earnings, steady profitability, and really sound balance sheets. So, clearly now is a time to be focusing on companies that have adequate cash, not, extreme debt levels, and really solid balance sheets.

We think that historically, higher-quality companies do outperform when earnings are weak. And we think that over the coming quarters, quality across sectors, but also tending to have a little bit actually higher concentration in some of the tech parts of the market where those companies do tend to carry larger cash balances, we think that that will be a good place to be positioned.

Tony Roth: All right. Thank you very much. I want to thank everybody for joining today. Thank you again to our speakers. Have a great day everybody.


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