(Bloomberg) — A selloff in US bank stocks is threatening to push them below a technical boundary that could signal more pain for the broader stock market.
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The financial index has remained above its 2007 high since January 2021. If it were to fall through that barrier now, it would be an ominous sign for the broader stock market, said hedge-fund manager Jim Ropell, founder of Ropell Capital Management.
Why? Because it could put further pressure on banks to conserve capital and cut lending, adding a drag to an economy already at risk of recession after the Federal Reserve's sharp interest rate hikes over the past 14 months.
“You can't have a bull market if bank stocks are declining,” said Roeppel, who is a long-term bull but is currently investing in defensive plays such as gold and gold mines. Mostly with cash. “It's as if an Olympic athlete has cinder blocks around his feet.”
Concerns about the stability of the banking system contributed to the stormy week as investors aggressively bet against stocks. While share prices jumped on Friday amid speculation selling was higher, many remained sharply down, with Western Alliance Bancorp plunging 27% last week and PacWest Bancorp plunging 43%.
But concern continues on Wall Street that the ongoing turmoil among regional banks could prompt a tightening in lending. In fact, traders are betting the toll could be so great that they bet the Fed — which indicated Wednesday's rate hike could be its last — to stimulate the economy as soon as July. Will start easing monetary policy soon.
Still, Nancy Tengler, chief investment officer at Laffer Tengler Investments, said it's too early to return to beaten-down bank stocks. Instead, his focus is on technology and consumer-related stocks, which will benefit from falling interest rates, although his firm added shares in PNC Financial Services Group Inc after posting strong profit growth and rising deposits.
“It's not smart to go chasing some of these other bank stocks,” Tengler said. “You have to let the falling knife fall.”
Collier cautioned, “We have to see that the financial situation paves the way for the stock market to move permanently upwards – but that is not happening.” “Don't pick up nickels and dimes in front of a steam roller.”
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