As earnings season begins, we’re struck by how little bank stocks have recovered since the collapse of Silicon Valley Bank. Certain financial institutions will continue to feel the impact of deposit outflows and slowing economic growth, but the acute crisis seems to be behind us.
Even after the collapse of Bear Stearns in 2008, banks quickly recovered 70% of their year-to-date losses. Today, banks have not participated in the recent stock market rally even as earnings from large institutions like JP Morgan have been better than many investors expected. The question is: why haven’t investors responded more positively?
We suspect that investors are anticipating a challenging macroeconomic environment for banks as we move through the rest of 2023 — a loosening labor market, less consumer demand, lower corporate profits, and increasing pressure on credit markets. Underperformance from cyclical-oriented sectors is not unusual when the 2-Year Treasury yield is below the target Federal Funds rate as it is today. This often occurs before economic contractions as the bond market anticipates imminent rate cuts in response to challenging economic conditions.
Bottom line: we think the recent price action of banks is noteworthy, and supportive of our view that the economy will be challenged in the second half of 2023. As a result, we continue to recommend less exposure to cyclical-oriented asset clauses versus our typical baseline exposure.
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