Are US Bank Stocks on the Verge of a Crisis-Era Repeat?

"US Bank Shares Tumble, Threatening Broader Stock Market as First Republic Bank Collapse Fuels Solvency Fears Among Regional Lenders"

US bank shares are on the brink of falling below a crucial technical threshold that could signal more trouble for the broader stock market. The collapse of First Republic Bank has heightened concerns about the solvency of regional lenders, causing investors to pummel financial stocks. As a result, the S&P 500 financials index is close to dropping below its 2007 peak. If this were to happen, it would be an ominous sign for the broader stock market, according to hedge-fund manager Jim Roppel, founder of Roppel Capital Management. This could put further pressure on banks to conserve capital and cut back on lending, adding a drag to an economy already at risk of a recession after the Federal Reserve’s steep interest-rate increases over the past 14 months.

Last week saw a tempestuous week as investors aggressively bet against bank stocks, leading to a sell-off. While share prices rebounded on Friday amid speculation that the selling was overdone, many remained down steeply. Western Alliance Bancorp sank 27% last week, and PacWest Bancorp plunged 43%. Individual investors, who were some of the market’s most reliable dip buyers in 2020 and 2021, scooped up some bank stocks amid the rout. In the week through Wednesday, they were net buyers in shares of Bank of America, Truist Financial, and SoFi Technologies, data compiled by JPMorgan Chase Peng Cheng show.

However, there is continuing concern on Wall Street that the ongoing turmoil among regional banks could fuel a tightening in lending. Traders are betting that the toll could be so great that they stepped up wagers that the Fed will start easing monetary policy as soon as July to stimulate the economy. Despite this, Nancy Tengler, chief investment officer of Laffer Tengler Investments, said it is too soon to wade back into shares of beaten-up banks. Instead, she has been focused on technology and consumer-related stocks that would benefit from a drop in interest rates, though her firm added shares PNC Financial Services Group after it delivered strong profit growth and growing deposits.

The stock-market rebound on Friday was fueled by the stronger-than-expected monthly jobs report for April, which tempered fears of a recession. Still, while the 1.9% rally in the S&P wiped out most of last week’s decline in the broad benchmark, the financial stocks in the index lost 2.7% over the five sessions. Scott Colyer, chief executive at Advisors Asset Management, said the S&P 500 would have to slump to 3,600 or lower for him to become more optimistic about stocks, as valuations remain pricey. It closed at about 4,136 on Friday.

“We have to see financials leading the way for the stock market to be in a sustainable uptrend — but that’s not what’s happening,” said Mr Colyer. “Don’t pick up nickels and dimes in front of a steam roller.”

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