The sell-off in U.S. bank stocks threatens to push them below a technical threshold that could signal more trouble for the broader stock market.
As the collapse of First Republic Bank heightens fears over the solvency of regional lenders, investors have hurt financial stocks, leaving the S&P 500 financial index on the verge of falling below its 2007 peak. For perspective, after the credit crash of 2008, it took more than a decade for this gauge to regain the ground it had lost.
The financial index has been above the 2007 high since January 2021. If it were to breach that barrier now, it would be a worrying signal for the broader stock market, said hedge fund manager Jim Roppel, founder of Roppel Capital Management.
For what? Because it could put additional pressure on banks to hold on to capital and reduce lending, adding a drag on an economy already threatened with recession after the Federal Reserve’s steep interest rate hikes over the past 14 last months.
“You can’t have a bull market if bank stocks are falling,” said Roppel, who is a long-term bull but is currently mostly cash with the rest in defensive plays like gold and gold miners. gold. “It’s as if an Olympic athlete had cinder blocks around his legs.”
Worries over the stability of the banking system contributed to a tumultuous week as investors bet aggressively against stocks. While stock prices rebounded on Friday amid speculation that the selloff was overdone, many remained sharply lower, with Western Alliance Bancorp sinking 27% last week and PacWest Bancorp plunging 43%.
Individual investors – who were among the market’s most reliable dip buyers in 2020 and 2021 – clawed back some bank stocks amid the rout. In the week through Wednesday, they were net buyers of shares in Bank of America Corp., Truist Financial Corp. and SoFi Technologies Inc., data compiled by JPMorgan Chase & Co.’s Peng Cheng show.
But Wall Street remains concerned that ongoing turmoil among regional banks could fuel a lending crunch. In fact, traders are betting the balance sheet could be so big that they’ve stepped up bets that the Fed – which just signaled that Wednesday’s rate hike could be the last – will start easing monetary policy as soon as July to stimulate the economy.
Even so, Nancy Tengler, chief investment officer of Laffer Tengler Investments, said it was too early to get back into battered bank stocks. Instead, she focused on technology and consumer-related stocks that would benefit from lower interest rates, although her company added PNC Financial Services Group Inc. shares after posting a drop. strong growth in profits and growing deposits.
“It’s not smart to chase some of these other bank stocks,” Tengler said. “You must drop the falling knife.”
Friday’s stock market rebound was fueled by the stronger-than-expected monthly jobs report for April, which tempered fears of a recession. Yet while the S&P’s 1.9% rally erased most of last week’s decline in the broad benchmark, financial stocks in the index lost 2.7% over the five sessions.
Scott Colyer, managing director of Advisors Asset Management, said the S&P 500 would need to drop to 3,600 or lower for it to become more bullish on stocks as valuations remain expensive. It closed at around 4,136 on Friday.
“We need to see financials leading the way for the stock market to be in a sustainable uptrend – but that’s not happening,” Colyer warned. “Don’t pick up nickels in front of a steamroller.”