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RB Advisors, founded by former Merrill Lynch chief quantitative strategist Richard Bernstein, correctly predicted the current market upheaval in last year’s The biggest risk to portfolios today. In a new report this week, RB Advisors deputy chief investment officer Dan Suzuki provided further important context with Some thoughts on the banks by providing four important observations about ongoing volatility in the sector.

First, and most important, Mr. Suzuki does not believe financial stress will tank the U.S. economy. He argues that this isn’t a ‘hair on fire’/it’s time to panic moment for U.S. markets, although “it is for some banks, for the Technology sector, and for venture capital speculators.”

Second, RB Advisors voices some surprise about the intense investor reaction to bank-related difficulties. The firm notes that the entire point of central bank monetary tightening is to make life more difficult for bank lending.

To some extent, the current crisis was caused by the extremely loose monetary policy. U.S. money supply growth reached a 27 per cent year-over-year peak in early 2021 (it hit 19 per cent in Canada), creating an easy money, highly speculative environment.

The struggling venture capital firms that dominated Silicon Valley Bank’s deposit base are indicative of a large number of start-ups that made sense as investments at lower interest rates, but are struggling with higher borrowing costs and less funding now. With bond yields higher, there are solid alternatives to investing in high-risk small companies.

Mr. Suzuki’s fourth point arises from the third. He believes there will be ongoing stress on the broader technology sector, including large and small companies at all stages of development.

The S&P/TSX Composite’s smaller relative weighting in technology implies that domestic markets will be less affected by these trends than the S&P 500, although Shopify remains among the index’s largest companies.

The Canadian banks are likely to feel some stress. The banks with large operations in the U.S. will be in the way of local volatility. In addition, the rise in short-term bond yields on both sides of the border raises the costs of bank funding. This implies that the basic borrowing at short rates, lending at longer term rates’ practice of lending becomes less profitable.

It also might be the case that rising bond yields incentivize funds out of low-paying bank deposits and into other asset classes like money market funds and bond funds. This complicates lending for the banks and helps drive deposit rates higher, lowering profit margins.

-- Scott Barlow, Globe and Mail market strategist

Also see:

Stock markets shudder Wednesday as Credit Suisse sparks fresh bank selloff, bond yields dive

Tim Kiladze: Why banking sector drama isn’t as scary as 2008, but social media makes SVB contagion tricky to manage

David Berman: Canadian bank stocks take hit after SVB collapse. There’s a good case to buy now

Tim Shufelt: After interest rate hikes, SVB won’t be only casualty

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Stocks to ponder

Osisko Gold Royalties Ltd. (OR-T) Year-to-date, Osisko’s share price is up 15 per cent, making it the 11th-best performing stock out of 50 stocks in the S&P/TSX materials index. The gold sector this week has been rallying amid turmoil in the financial sector, and the stock could be appealing for those seeking exposure to the precious metal without direct production and development costs. Jennifer Dowty looks at the investment case.

Also see: Gold bulls hope short-term bank contagion sparks longer-term rally

The Rundown

Why the long-term outlook for Canadian stocks is looking rosy (short term, not so much)

David Rosenberg and economist Brendan Livingstone expect equities to see continued selling pressure due to tighter financial conditions and rising recession odds, but believe long-term investors should use future periods of weakness to add to Canadian stocks, given their attractive valuations. However, in light of the weakness in the Canadian dollar, and the softness in domestic demand, they have a suggestion on how to screen for the right stocks within Canada.

Others (for subscribers)

Number Cruncher: 10 commodity-linked equities for diversified portfolios

Number Cruncher: 10 Canadian companies creating value with their capital

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: CIBC’s CEO buys shares on the dip with a $3-million purchase

Globe Advisor

Asset managers warn too much choice is confusing retail investors

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Compiled by Globe Investor Staff