Good morning. More American banks are taking a tumble, sowing seeds of springtime confusion given that policymakers and government officials seem to think there’s no risk of contagion. United States Federal Reserve chair Jerome Powell even believes the U.S. banking system is “sound and resilient,” certainly nothing to stop him from raising interest rates on Wednesday for the 10th time in a little more than a year. Crisis? What crisis?
This after the failure of three American banks in the past couple of months, most recently First Republic Bank, whose shareholders were completely wiped out when JPMorgan Chase & Co. paid the Federal Deposit Insurance Corp. US$10.6 billion to take it over. That’s not to mention the huge selloff in the other regionals, including PacWest Bancorp and Western Alliance Bancorp, the day before Powell made the decision to hike the Fed rate to five per cent, and after, too.
PacWest on Wednesday confirmed it was seeking strategic options including a potential sale, and on Thursday, Toronto-Dominion Bank decided it was worth paying US$225 million to call off its US$13.4-billion acquisition of First Horizon Corp. The regional U.S. bank’s shares dropped as much as 40 per cent on the news. Nope, nothing to see here, folks.
Oh, wait, there’s more. “We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties,” says Charlie Munger, the 99-year-old investor and sidekick to billionaire Warren Buffett, about the banking sector’s vast portfolios of commercial property loans. “There’s a lot of agony out there.”
The Dow Jones U.S. Banks Index was down as much as 27.5 per cent on Thursday from its year-to-date high in February, before all this commotion began, despite some better-than-expected results from the big banks such as JPMorgan and Bank of America Corp. By comparison, the main board is flat for the year and down just 3.4 per cent from its year-to-date high. The S&P 500, meanwhile, is up 6.2 per cent on the year, though down 2.8 per cent from February.
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The difference between the two indexes is mainly due to the S&P 500’s reliance on Big Tech, which was a big drag in 2022. Just seven companies, led by Apple Inc. and Microsoft Corp., have been responsible for 80 per cent of the index’s increase this year, according to Bloomberg data, a trend that may not be a good sign. “Once you have extreme readings like leadership in a few stocks, that’s usually signalling the fact that things are already quite bad,” says Denise Chisholm, director of quantitative market strategy at Fidelity Management & Research Co. “It’s a sign more often that the market is bottoming.”
But lest we be accused of peddling bad news, let’s remember one of Buffett’s most popular sayings: Be fearful when others are greedy and greedy when others are fearful. It’s tough to be a contrarian, but there’s an odd malaise amongst investors right now. The VIX fear gauge hit a year-long low of 15.78 at the end of April and even though it has spiked 21.5 per cent since then, it’s well off its reading of 66 when the pandemic took hold in March 2000 and below the 30 or so it was at for much of 2022. RBC Capital Markets points out that the 12-month forward gain in the S&P 500 has been more than 17 per cent on a median basis when the VIX has moved above 25 since the late 1990s so perhaps some more fear will be good.
RBC also points to another possible buying signal, which is that the net bullishness on the AAII Investor Sentiment Survey is hitting post-financial crisis lows. The bearish bloc is now 44.9 per cent, the 70th time out of the past 75 weeks it has been above its historical average of 31 per cent. The American Association of Individual Investors says “above-average market returns have often followed unusually low levels of optimism.” And RBC believes this deep level of bearishness is “the best reason for thinking any further downside will be limited from here.”
Of course, that outlook depends on a recession not happening, which is something Fed chair Powell certainly doesn’t see coming even though most measures, including his favourite yield curve, now inverted by a whopping 200 points, indicate the opposite from a historical perspective. “I continue to think that it’s possible that this time really is different,” he says. “Avoiding a recession is, in my view, more likely than having a recession.” Here’s hoping he’s right, although stagflation could be the result, Either way, investors might end up calling his myopic inflation-fighting policy the crime of the century.
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Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].
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FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.
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If you have an investing or personal finance question, hit us up at [email protected].
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