A selloff in US bank shares threatens to push them below a technical threshold that could signal more pain ahead for the broader stock market.
With the collapse of First Republic Bank Worsening fears about the solvency of regional lenders, investors pummeled financial stocks, leaving the S&P 500 financials index on the verge of falling below its 2007 peak. For perspective, after the 2008 credit crash it took more than a decade for that gauge to regain the ground it had lost.
The financial index is above its 2007 high since January 2021. If it falls below that barrier now, it would be a bad signal for the broader stock market, said hedge-fund manager Jim Roppel, founder of Roppel Capital Management.
Why? Because it will put more pressure on banks to conserve capital and cut lending, adding a drag to an economy at risk of a recession after the Federal Reserve’s steep interest rate hikes in last 14 months.
“You can’t have a bull market when bank stocks are down,” said Roppel, who is a long-term bull but is currently mostly in cash with the rest of defensive plays like gold miners and gold. “It’s like when an Olympic athlete has cinder blocks on their legs.”
Concerns about the stability of the banking system contributed to a wild week as investors bet aggressively against stocks. While share prices rebounded on Friday amid speculation that the sell-off was over, many remained bullish, including Western Alliance The Bancorp after sinking 27% last week and PacWest Bancorp fell 43%.
Individual investors — who were some of the most reliable dip buyers in the market in 2020 and 2021 — scooped up some bank stocks amid the rout. In the week to Wednesday, they were net buyers of shares in the Bank of America Corp., Truist Financial corp. and SoFi Technologies Inc., data compiled by JPMorgan Chase Peng Cheng’s performance in & Co.
But there is persistent concern on Wall Street that the ongoing turmoil at regional banks could fuel a tightening of lending. In fact, traders are betting that the toll could be so large that they are raising bets that the Fed – which has signaled that Wednesday’s rate hike could be its last – will start easing monetary policy soon. that July to stimulate the economy.
Still, Nancy Tengler, the chief investment officer of Laffer Tengler Investments, said it’s too soon to return to shares of battered banks. Instead, he focused on technology and consumer-related stocks that would benefit from falling interest rates, even as his company increased shares. PNC Financial Services Group Inc. after it has generated strong growth in profits and growing deposits.
“It’s not smart to chase some of these other bank stocks,” Tengler said. “You have to let the falling knife fall.”
Friday’s stock-market rebound was fueled by a stronger-than-expected monthly jobs report for April, easing fears of a recession. However, while the S&P’s 1.9% rally erased much of last week’s decline in the broad benchmark, financial stocks in the index lost 2.7% in five sessions.
Scott Colyer, chief executive of Advisors Asset Management, said the S&P 500 would need to fall to 3,600 or lower for him to be more optimistic about stocks, as valuations remain expensive. It closed at about 4,136 Friday.
“We need to see that there are financials leading the way for the stock market to be in a sustainable development – but that is not the case,” warned Colyer. “Don’t take nickels and dimes in front of a steam roller.”