Bank stocks are approaching the threshold of the crisis period and are sounding the alarm

With the collapse of Bank of the First Republic Investors have wreaked havoc on financial stocks as fears mounted over the default of local lenders, with the S&P 500 financial index on the verge of falling back from its 2007 high. For perspective, after the 2008 credit crash, it took more than a decade for this metric to regain lost ground.

The financial index has been above the 2007 high since January 2021. Breaking that barrier now would be an ominous signal for the broader stock market, said hedge fund manager Jim Roppel, founder of Roppel Capital Management.

Why? Because it could put further pressure on banks to conserve capital and restrict lending, which could add to the strain on an economy already on the brink of recession after the Federal Reserve’s steep rate hikes over the past 14 months.

“You can’t have a bull market when bank stocks are falling,” said Roppel, who is a long-term bull but is currently mostly cash with the rest in defensive games like gold and gold mines. “It’s like an Olympic athlete with cinder blocks around his legs.”

wild week

Concerns about the stability of the banking system contributed to a tumultuous week as investors bet aggressively against stocks. While share prices rallied on Friday on speculation that the selling was overdone, many at Western Alliance remained sharply lower bank corp down 27% last week and PacWest Bancorp down 43%.

Individual investors — who have been among the market’s most reliable dip buyers in 2020 and 2021 — bought some bank stocks amid the flight. For the week ended Wednesday, they were net buyers of shares Bank of America corp, Trustworthy finances corp and SoFi Technologies Inc., data compiled by JPMorgan Chase & Co.’s Peng Cheng Show.

On Wall Street, however, there are lingering concerns that the ongoing turmoil at regional banks could lead to tighter lending. In fact, traders are betting that the toll could be so great that they increased their bets that the Fed – which just signaled Wednesday’s rate hike could be its last – will begin easing monetary policy as early as July to stimulate the economy.

Still, Nancy Tengler, chief investment officer at Laffer Tengler Investments, said it’s too early to get back into stocks of troubled banks. Instead, she focused on technology and consumer-related stocks that would benefit from a fall in interest rates, although her firm added stocks PNC Financial Services Group Inc. after delivering strong earnings growth and growing deposits.

“It’s not wise to chase some of these other bank stocks,” Tengler said. “One must drop the falling knife.”

Friday’s stock market rally was fueled by a stronger-than-expected April jobs report, which dampened fears of a recession. While the 1.9% rally in the S&P erased most of the broad benchmark’s decline over the past week, financial stocks in the index are down 2.7% over the five sessions.

Scott Colyer, chief executive at Advisors Asset Management, said the S&P 500 needs to drop to 3,600 or below for it to become more bullish on stocks as valuations remain expensive. It closed at about 4,136 a.m. on Friday.

“We need to make sure that financials lead the way for the stock market to be in a sustained uptrend – but that’s not the case,” Colyer warned. “Don’t pick up nickels and dimes in front of a steamroller.”