"If Bank Stocks Fall, Bull Market Expectations Fade" Concerns Over Regional Banks Persist

The sense of crisis surrounding regional banks in the United States is not subsiding easily. Last week, the stock prices of major regional banks, including PacWest Bancorp, plummeted but managed to rebound on Friday, although volatility remains extremely high. Investors continue to worry that turmoil originating from regional banks will further fuel lending tightening and drag down bank stocks overall.

Bloomberg reported on the 7th (local time) that with the bankruptcy of First Republic Bank reigniting concerns about a banking crisis, the S&P 500 financial sector index is at risk of falling below the pre-global financial crisis high recorded in 2007. Based on the closing price on the 5th, the S&P 500 financial index stood at 536.83, down 5.78% from the beginning of the year. This contrasts sharply with the nearly 8% rise in the S&P 500 index over the same period. Despite Friday’s rebound, last week PacWest and Western Alliance Bancorp’s stock prices fell by 43% and 27%, respectively.

The report stated, "Concerns about the solvency of regional banks have increased, and investors have sold off bank stocks, resulting in a turbulent week," adding, "This sell-off in bank stocks poses a threat that could push the broader stock market below technical thresholds, signaling greater pain ahead."

[Image source=Reuters Yonhap News]

The S&P 500 financial index, which was hit hard during the global financial crisis, took more than 10 years to recover its 2007 peak. The market is cautious that the current banking crisis could repeat the shock experienced then. The S&P 500 financial index only surpassed the 2007 peak level of 500 in January 2021. Jim Loeb, founder of Loeb Capital Management and a hedge fund manager, warned, "If this barrier falls now, it will be a bad omen for the overall stock market," adding, "If bank stocks decline, a bull market cannot come."

In particular, concerns about an economic recession have grown recently due to the Federal Reserve’s rapid interest rate hikes since last year. Additionally, after the Silicon Valley Bank (SVB) incident, the aftershocks from regional banks continue, raising fears of credit tightening in the banking sector. This inevitably weighs heavily on the U.S. economy and the stock market overall.

Warren Buffett, chairman of Berkshire Hathaway and known as the "investment genius," warned at the shareholder meeting held in Omaha the day before that the banking crisis could worsen following the SVB bankruptcy. Jeffrey Gundlach, CEO of DoubleLine Capital and known as the "Bond King," also appeared on the economic media CNBC last week, expressing concerns that if the Fed maintains the current interest rate level, stress in the banking sector will continue, raising the possibility of additional regional bank failures.

Last week, the Fed raised the benchmark interest rate by 0.25 percentage points and also signaled a possible pause in future hikes. This week, inflation indicators closely watched by the Fed, such as the Consumer Price Index (CPI) and Producer Price Index (PPI), will be released consecutively. The U.S. core CPI increase rate for April is estimated to be 5.5% year-over-year, a moderation compared to the rise in March.

This content was produced with the assistance of AI translation services.