Mitch's Mailbox

May 15th, 2023

Regional Banks Still Facing Turbulence

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Karen P. from Novato, CA asks: Hello Mitch, with First Republic’s failure and Pacific Western Bank’s stock collapse last week, it does not seem like the bank crisis is over yet. A month ago both of these were highly respected banks on the West Coast, but it has been such a rapid fall. Do you see more turbulence ahead?

Mitch’s Response:

Thanks for sending your question. Financial stocks in general have been wobbling for the past several weeks, exhibiting more volatility than the broad markets. I would even point out that bank stocks had been in a volatile patch before Silicon Valley Bank’s failure tipped the sector into stress mode, which in my view is just another example of the market anticipating problems before they’re widely apparent.1

Last week, there was not too much surprise across markets when First Republic went into receivership, as the problems at the bank were well-known, as were the discussions to take it over. This week saw stress in many key regional bank names – PacWest like you mentioned, but also First Horizon and Western Alliance. I think a decent portion of the selling pressure can be attributed to bearish options traders and short sellers hunting for weak links in the regional bank sector, in anticipation that jitters would continue to spread.

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For many of these smaller regional banks, a crisis of confidence can lead to an actual crisis, if depositors get rattled and decide to pull money. In PacWest’s case, the bank made a statement on Thursday that core customer deposits were actually up since the end of the first quarter, which sent the stock soaring the next day. I won’t argue with the idea that it’s very ‘touch-and-go’ for many of these small and midsize banks. Depositors are on edge and can be unnerved easily.

In my view, the thesis from an investment standpoint is just to steer clear of regional bank stocks. Many are in far better shape than First Republic was on a fundamental level (capital and deposits), but any whiff of bad news – real or perceived – can lead to wild short-term moves in stock prices. Better to avoid altogether than to try and market time, in my view.

For their part, the Federal Reserve thinks that the worst of the banking crisis is behind us. In remarks this week following the 25-basis point rate hike, Chairman Powell said, “there were three large banks really from the very beginning that were at the heart of the stress that we saw in early March,” adding that “those have now all been resolved, and all the depositors have been protected.” Powell said he believes a line has been drawn that separates the troubled banks from the rest of the banking sector, particularly large banks which posted fairly solid earnings reports in Q1.

The way I see it, the bank stress currently is more about individual stock trading than it is about the economy and/or banking system at large, neither of which I think are at high risk.

So, what can investors expect in the months ahead? There isn’t an exact answer, but to help you protect your investments against rising interest rates, I recommend reading our new guide that covers the history of the Fed3 raising rates. You’ll get insight on:

If you have $500,000 or more to invest, download our free guide, The Federal Reserve is Raising Rates. What Does This Mean for Stocks? 3, today.

Disclosure

1 Wall Street Journal. May 4, 2023. https://www.wsj.com/articles/regional-bank-shares-dive-as-investors-fret-about-contagion-7717c91a?mod=hp_lead_pos1

2 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.

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