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.
What Do Rate Hike Changes Mean for Your Investments?
To help you protect your investments during times of uncertainty, I recommend reading our new guide that puts the current environment in the context of the past 70 years. You’ll get insight on:
- How stocks have performed historically in the midst of rising interest rates
- A brief history of Fed rate hike campaigns, and why they mattered
- Plus, more information and context to help make sense of the current environment so you can respond appropriately
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.
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:
- How stocks have performed historically in the midst of rising interest rates
- A brief history of Fed rate hike campaigns, and why they mattered
- Plus, more information and context to help make sense of the current environment so you can respond appropriately
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.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.
Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.