With First Republic Bank becoming the latest lender to collapse, reigniting concerns about the health of the banking sector, the S&P 500 Financials index stands on the verge of falling back below its 2007 peak.
What Happened: This is noteworthy because following the 2008 credit crash, it took over a decade for the index to recover the losses, reported Bloomberg.
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The index has been above the 2007 high since January 2021. However, if it were to fall through that barrier, it would be an ominous signal for the broader stock market, said hedge-fund manager Jim Roppel, founder of Roppel Capital Management, according to the report.
The reason is if banks feel pressured to conserve their capital, they are likely to cut back on lending which would further strain an economy hit by the Federal Reserve’s persistent rate hikes intended to tackle inflation.
“You can’t have a bull market if bank stocks are falling,” said Roppel. “It’s like if an Olympic athlete had cinder blocks around their legs,” he added.
Regional bank stocks took a major beating last week but witnessed a significant rebound on Friday after investors and traders felt the sell-off was overdone. However, Western Alliance Bancorporation WAL stock is still down by over 28% in last five days while PacWest Bancorp PACW has lost over 43% in the same period.
Broader markets, however, performed mixed. The SPDR S&P 500 ETF Trust SPY lost 0.68% in last five days while the Invesco QQQ Trust Series 1 QQQ gained 0.25% in the period.
Expert Take: Nancy Tengler, chief investment officer of Laffer Tengler Investments, said it’s too soon to get back into shares of beaten up banks, according to the Bloomberg report. “It’s not smart to chase some of these other bank stocks,” Tengler said. “You have to let the falling knife fall.”
Scott Colyer, chief executive at Advisors Asset Management, said financials should lead the way for the stock market to be in a sustainable uptrend but noted that’s not happening. “Don’t pick up nickels and dimes in front of a steam roller,” he said.