The collapse of the Silicon Valley Bank has dominated the week and stirred up volatility not just in the banking sector but also in the tech sector. The Nasdaq slumped in reaction to the bad news but the implications for interest rate policy could turn out to be good for tech stocks.
In order to understand what the collapse of the 16th largest bank in the US means for tech stocks, let’s look at why SVB failed and the knock effect.
Why SVB collapsed
SVB specialises in high-growth startups. It was the critical banking partner to innovative tech start-ups, software makers, and biotech firms. The Californian bank provided banking services to around 50% of US venture-backed tech and life sciences firms and 44% of venture-backed IPOs in 2022.
The bank grew rapidly with the tech sector. However, the Federal Reserve raising interest rates meant a more challenging environment for SVB’s clients, often fast-growing but loss-masking businesses.
Rising interest rates meant venture capital dried up, and borrowing became more expensive. The companies started to tap into their bank deposits. Total client funds went from a $40 billion inflow per quarter across 2021 to a $14.5 billion average quarterly outflow in 2022. Clients’ funds fell by more than SVB anticipated, leaving the bank needing to plug the whole.
SVB sold a chunk of its investment portfolio to make up the deficit left by falling deposit but it had to do so at a loss because the bonds had fallen in price significantly because of the rise in yields last year. Bad risk management forced the bank to sell more assets to meet the withdrawal need, leading to a classic bank run (but in the digital age).
What does this tell us about tech?
The US regulators will cover deposits fully, so the near-term risk of SVB’s customers being unable to pay staff has gone. However, the longer-term consequences could be much more serious, affecting conditions within the sector.
The collapse of a bank that was so central to the technology ecosystem will almost certainly put the spotlight on the risk of lending to cash-burning businesses. Molten Ventures, a listed venture capital fund, traded down 25% in recent days, while ARK Innovations, which is exposed to these such companies, is down 5% this month, adding to its multi-month decline.
The big players in the tech world, such as Google parent Alphabet and Meta, will not directly suffer from these funding restrictions but they are suffering from the broader macro environemnt that brought this situation about. All the big tech firms have annouced layoffs to deal with a slowing economy, notably for their services which had been in such high demand immediately after the pandemic.
The ripple effect could also be felt by larger software and cloud-computing companies, which also have start-up clients. Should funding to these businesses dry up, new workload growth could be limited, hitting revenue at large listed software firms.
Easing Fed bets boost the Nasdaq
But it may not all be bad news. The chaos that is continuing to unfold in the banking sector due to the sharp rise in interest rates is starting to raise questions over whether the Fed will hike interest rates much further.
Doubts are rising over whether the Fed will raise rates at the March FOMC meeting next week. Goldman Sachs has said that they don’t think the Federal Reserve will hike rates, and JP Morgan has lowered expectations to a 25-basis point hike.
According to the CME Fed watch tool, the market is pricing in an 80% probability of a 25-bps hike, and a 21% probability of the Fed keeping rates on hold. Just a week ago, the market was pricing in a 68% probability of a 50-basis point hike and a 31% chance of a 25-bps hike. Expectations for a rate cut at the end of this year are on the rise again.
Falling rate expectations are good news for tech growth stocks.
So, the other side of this coin is that should the cracks in the financial system, caused by the Fed hiking interest rates sharply, result in the Fed pausing rate hikes or even pivoting earlier, then that could help boost growth stocks. As aggressive Fed bets ease, the Nasdaq has actually pushed higher. While the index fell 1.7% on Friday as the SVB news broke, the tech-heavy index has risen every day this week.
Where next for the Nasdaq?
After finding support on the 100 sma, the Nasdaq has rebounded, rising above the 50 & 200 DMA. The 50 DMA also crossed above the 200 DMA in a golden cross bullish formation. This, combined with the RSI over 50 and a rise over the weekly high of 12,465, keeps buyers hopeful of further gains.
Buyers will look for a rise over 12,900, the 2023 high, to create a higher high and extend the bullish trend. Immediate support can be seen at 11,600 the December high. Below here, the 200 DMA at 11,900 could offer support ahead of 11,680, the March low. A break below here could see sellers gain momentum.
US Tech 100 – Daily Technical Chart
Source: TradingView / FlowBank