Chart of the Day: Regional Banks on the Rebound

Remember regional banks? Three months ago, they were allegedly the straw that was going to break the camel’s back. They may be small compared to the big-three megabanks, but they generate a large chunk of business lending, especially for small businesses, making a systemic crisis in regional banks a national economic threat. That was the big fear, at any rate. Yet, three months on from Silicon Valley Bank (SVB) and Signature Bank’s failures—and over a month since First Republic’s forced merger—the crisis hasn’t happened. In weeks past we have examined the regional breakdown of the Fed’s lending directly to banks, loan growth broken down by bank size and the Fed’s Senior Loan Officer Opinion Survey—which shows how regional banking issues affected banks’ willingness to take risk. All showed the impact wasn’t as broad as feared. Now stocks show this from another angle.

Exhibit 1 shows the KBW Nasdaq Regional Banking Index year to date. As you will see, it is down, and it hasn’t come close to erasing the sharp slide that began as SVB’s troubles mounted. In the weeks that followed its and Signature Bank’s failures, the industry’s slide continued. Another sharp drop accompanied First Republic’s seizure by the FDIC in early May. But for the past month, it has been on an upswing. Even with a small pullback Friday, it finished last week above its level when First Republic failed—and up 18.7% from its May 11 low.^[i]

Exhibit 1: Regional Banks’ Bounce

Source: FactSet, as of 6/9/2023. KBW Nasdaq Regional Banking Index, 12/31/2022 – 6/9/2023. Returns are price only, as total return data aren’t available.

This is not an absolute all-clear signal—those never exist in markets. Nor is it an argument to rush headlong into regional bank stocks, mind you. The initial bounce effect is nice, but we think other categories are better positioned for what we think looks increasingly like a young, global bull market. However, it is noteworthy that this rise occurred against a backdrop of commercial real estate fears, with office building defaults supposedly the second—and worse—shoe to drop. Not just for regional banks, but for the broader economy. If that were true, we think regional bank stocks would probably be pre-pricing it. That is how forward-looking markets work. But instead, they seem to have digested everything and moved on.

This is a timeless lesson: Markets move first, before people consciously realize things are better than feared. It happens time and again, both for sectors, industries and countries as well as global stocks overall. We have seen it this year in eurozone and German stocks, which mounted a strong recovery well before economic data showed the extent (thus far) of the winter’s economic downturn—they pre-priced the damage during 2022’s downturn and then looked to the recovery. Now we are seeing it with regional bank stocks. When in doubt, trust the market.