Bank Stocks Have Market Under Pressure Again

If there is any question why the market is up this week, it can be answered with the following data: we can say that the market-cap weighted S&P 500 is up 2.6% for the week entering today. It has been a good week for “the market” at first blush, but as most people may be aware, there is more to it than meets the eye.

The strength in the mega-cap stocks can be attributed in large part to their distance from the banking issues and the strength of their balance sheets. In other words, they have been deemed safety outlets for investors wanting/needing equity market exposure in the wake of losses elsewhere due to the upheaval caused by the banking issues.

Another element of support for the mega-cap stocks relates to the thinking that the banking issues are going to lead to a more challenging economic growth environment; therefore, these mega-cap companies are being favored as plays on a slower growth environment as their business is expected to hold up better than most if economic times do get quite tough.

The price action elsewhere conveys the festering worries about growth prospects. The cyclical energy (-5.6%), materials (-2.0%), and industrials (-0.8%) sectors are underperforming “the market” this week along with the financial sector (-2.9%). In turn, small-cap and mid-cap stocks, which tend to have a larger domestic sales concentration, are underperforming “the market” this week. The Russell 2000 is down 0.1% and the S&P Midcap 400 is down 0.9%. Also, the 2-yr note yield has plunged 52 basis points to 4.07%.

The weakness is expected to persist at today’s open.

Currently, the S&P 500 futures are down 29 points and are trading 0.7% below fair value, the Nasdaq 100 futures are down 30 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 278 points and are trading 0.8% below fair value. The 2-yr note yield is down seven basis points to 4.07%.

Note that the Nasdaq 100 futures are exhibiting relative strength. The losses anticipated there at the open are quite small relative to the 6.4% gain registered this week by the Nasdaq 100.

In any case, the negative disposition for the broader market has a familiar driver: worries about the state of the banking industry.

Yesterday’s turnaround effort hinged on a Wall Street Journal report that several big banks were discussing a capital infusion for First Republic Bank (FRC). That reporting was confirmed later in the day when 11 banks, including JPMorgan Chase (JPM) and Bank of America (BAC), announced they would be making $30 billion of uninsured deposits at First Republic Bank.

FRC, down as much as 36.5% at one point yesterday, ended the day up 10%. Well, it is indicated 18.6% lower in pre-market action, having reported after yesterday’s close that its borrowing from the Federal Reserve from March 10 to March 15 varied from $20 billion to $109 billion. First Republic also said it will be suspending its common share dividend.

Not the most comforting update. In the same vein, market participants have learned that bank borrowing from the Fed’s discount window hit a record high of approximately $153 billion for the week ending March 15, exceeding anything seen during the financial crisis. 

Without any specific detail on the borrowers, the regional bank stocks as a group are back on the defensive.

It is evident, then, that there will be a concentration of selling interest on the bank stocks when trading begins. That will weigh on the market, but just how much it will weigh is apt to hinge again on the performance of the weighty mega-cap stocks, which have saved “the market” this week.

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Originally Posted March 17, 2023 – Bank stocks have market under pressure again

(Editor’s note: the comment has been updated to include the date range of FRC’s borrowing from the Federal Reserve)