Bank Volatility and The Upside of Crisis

What a difference a banking crisis makes. In only two weeks, turbulence in the U.S. and international banking system has altered the path of Federal Reserve policy and consequently the performance of financial markets. As I explain below, a shrewd investor never lets a crisis go to waste.

The Fed has vowed to continue fighting inflation, but the need to inject the banking system with liquidity has tempered the central bank’s hawkishness. We’re also likely to see a wave of bank restructurings that create money-making opportunities.

Consolidation in the U.S. regional banking industry already is underway. North Carolina-based First Citizens BancShares (NSDQ: FCNCA) announced on Monday an agreement with the Federal Deposit Insurance Corp. (FDIC) to acquire all of the deposits and loans of Silicon Valley Bank (SVB), which had been moved to an FDIC-created bridge bank after SVB’s collapse.

A pause in the Fed’s tightening cycle has gotten a lot closer, thanks to the failures of SVB, Signature Bank, and Silvergate Capital; the woes of First Republic Bank (NYSE: FRC) and PacWest Bancorp (NSDQ: PACW); and the announced merger of Credit Suisse (NYSE: CS) and UBS (NYSE: UBS).

Banking crises are disruptive events not only to financial systems but to the broader economy, and the shockwaves travel through the stock market, too.

The imposition of tougher lending standards and greater caution among bankers, due to the banking crisis, will apply a brake on economic growth, helping ease inflation.

As expected last week, the Fed hiked rates by 25 basis points in its March meeting, but currently seems closer to the pause so coveted by Wall Street.

Markets currently forecast no additional rate hikes and expect the Fed to begin cutting rates as early as its July meeting. Sometimes, in life and investing, adversity brings unexpected advantages.

The main U.S. and global stock market indices were volatile last week, but they managed to finish in the green (see chart).

Bond markets also have experienced volatility, with the 2-year Treasury yield falling from over 5.0% to currently about 4.0%, as investors lean toward traditional safe-haven assets and as Wall Street’s expectations for rate cuts increase. Investors are looking ahead toward economic recovery.

WATCH THIS VIDEO: Here’s Why 2023 Is Not 2008

That said, a new cloud on the banking horizon has emerged in the form of Deutsche Bank (NYSE: DB), yet another European banking behemoth that has seen its share price drop. DB’s recent operating results have been strong, but its restructuring campaign has prompted fears it would become another Credit Suisse.

It’s worth noting that Deutsche Bank has a problematic reputation, similar to Credit Suisse’s, for getting embroiled in various money-laundering scandals. The usual suspects, i.e. Russian gangsters, Kremlin-linked oligarchs, and crooked politicians, have played central roles in DB’s legal woes. It’s likely, though, that because of its robust balance sheet and large market cap of $21 billion, DB will eventually weather the storm.

What’s more, giant U.S.-based banks, such as JPMorgan Chase (NYSE: JPM), remain well-capitalized and they’ll probably get even bigger as depositor wealth from failed banks shifts to their coffers.

Beleaguered regional banks also make tempting takeover targets for larger rivals. Bargain hunters should consider gaining exposure to inherently sound regional banks whose share prices were unfairly beaten down in recent days.

Now’s an opportunity to pinpoint likely takeover targets in the banking sector. The banking crisis is likely to spawn a surge of mergers and acquisitions (M&As).

My colleague, Nathan Slaughter, chief investment strategist of Takeover Trader, is an expert in M&A plays. You can read my recent interview with him here.

After First Citizens said it would absorb SVB, investors were further assured that 2023 will not be 2008 redux.

The main U.S. stock market indices closed mostly higher on Monday, as follows:

  • DJIA: +0.60%
  • S&P 500: +0.16%
  • NASDAQ: -0.47%
  • Russell 2000: +1.08%

The S&P 500 posted its third straight day of gains. Bank shares led the way.

The week ahead…

The following economic reports, scheduled for release in the coming days, stand out:

S&P Case-Shiller home price index and U.S. consumer confidence (Tuesday); pending U.S. home sales (Wednesday); U.S. gross domestic product and initial jobless claims (Thursday); personal income, personal spending, the personal consumption expenditures (PCE) price index and consumer sentiment (Friday).

The big enchilada, of course, will be Friday’s PCE. The PCE is the Fed’s preferred inflation measure because it covers a much broader range of spending than the consumer price index (CPI), which only reflects out-of-pocket spending. If the PCE numbers continue to show a significant easing of inflation, we’ll probably witness a relief rally in stocks. Stay tuned….and stay invested.

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John Persinos is the editorial director of Investing Daily.

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