Not a Black Swan: Banking Woes, Explained

I heard an analyst on television yesterday opine that he “expects” turmoil in the banking sector to serve as a black swan for investors. I got exasperated and shouted at the TV: “Nobody expects a black swan!”

I was reminded of a classic Monty Python sketch. When a man is asked a question by his nagging wife, he snaps: “I didn’t expect some kind of Spanish Inquisition!” Trumpets suddenly blare and into the room burst three Spanish cardinals from the 15th century. The lead cardinal shouts: “Nobody expects the Spanish Inquisition!” More silliness ensues.

The fact is, a black swan is by definition unexpected. Unforeseen by probability models, a black swan is a complete surprise with severe consequences.

The term black swan comes from the archaic belief that all swans had white feathers. When European explorers discovered black swans in Australia in 1697, it surprised everyone.

The failures in recent days of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital stunned financial markets, but they haven’t triggered a global meltdown.

Let’s be clear: Despite the hyperbole you’re probably hearing, we’re not facing another 2008. The U.S. banking system seems to have stabilized, as federal regulators promise to make depositors whole.

While some stocks will likely get hit in the short term, long-term investors shouldn’t freak out. Your best strategy right now is probably to do nothing. If you have an investment plan, stick to it.

Here’s a blessing: We’ll likely hear nothing from Federal Reserve Chief Jerome Powell, until the Federal Open Market Committee (FOMC) policy meeting March 21-22. Investment bank Goldman Sachs (NYSE: GS), which often acts as the Fed’s mouthpiece, stated in a note last Sunday that it currently expects the FOMC to leave rates unchanged. That’s bullish.

Credit Suisse yodels on…

The latest concerns about Credit Suisse (NYSE: CS) haven’t exactly helped investor sentiment. The bank recently reported a massive loss for full-year 2022, largely due to an exodus of ultra-wealthy clients and the continued erosion of the bank’s reputation.

The bank’s share price swooned Wednesday after its biggest backer, Saudi National Bank, announced that it would halt any further funding.

But CS shares rebounded Thursday, after the Swiss National Bank provided Credit Suisse with a $54 billion lifeline. Beaten-down European bank stocks also rebounded.

In addition to insufficient liquidity, Credit Suisse has been grappling with a credibility problem. The bank has a history of getting involved in dodgy activities, and in the past has been found guilty of money laundering and fraud.

Yes, these banking sector developments are all unpleasant, but not on the magnitude of a black swan.

WATCH THIS VIDEO: After SVB’s Collapse, Will The Dominoes Fall?

Wall Street seems to agree. The main U.S. stock market indices finished sharply higher Thursday, with financial services stocks in the lead. Fear also eased. Here are the numbers, after the closing bell:

  • DJIA: +1.17%
  • S&P 500: +1.76%
  • NASDAQ: +2.48%
  • Russell 2000: +1.45%

The Financial Select Sector SPDR Fund (XLF) and the SPDR S&P Regional Banking ETF (KRE) jumped 1.91% and 3.52%, respectively. The CBOE Volatility Index (VIX), aka “fear gauge,” fell about 12%. The S&P 500 is on track for its best week since January.

Despite the volatility and fear generated by these banking difficulties, I don’t see a convincing case for financial contagion. Regulators have moved swiftly and decisively, and systemically important financial institutions, especially the money center banks based in the U.S., remain on solid footing.

The PPI brings good news…

Positive inflation news lately has kept a floor under stocks. The U.S. Bureau of Labor Statistics reported Wednesday that the producer price index (PPI) made a greater-than-expected move lower.

The PPI is a measure of inflation and tracks the prices producers pay for goods. The index fell 0.1% in February, well below estimates of a 0.3% increase, and the actual 0.3% gain in January.

On a 12-month basis, the index increased 4.6%, well below the downwardly revised 5.7% level from the previous month.

Excluding food, energy and trade, the core PPI index climbed 0.2%, down from the 0.5% gain in January. On an annual basis, that reading was up 4.4%, the same as in January. Core PPI was flat, compared to the estimate for a 0.4% gain.

A 0.2% decline in goods prices helped drive the headline drop, representing a dramatic pullback from the 1.2% jump in January (see chart).

Most of the decline in goods derived from a 36.1% plunge in wholesale chicken egg prices, which had soared over the past year due to an avian flu outbreak.

In another deflationary signal, the U.S. Census Bureau reported Wednesday that retail sales also fell, down 0.4% last month, as consumers reduced spending.

The PPI and retail sales data are encouraging news on the inflation front. When combined with the recent drama over banking, these economic reports make a convincing argument that the Fed has leeway to get less hawkish.

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John Persinos is the editorial director of Investing Daily.

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