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Bank stocks are in need of a “recovery rally” to show that higher interest rates won’t necessarily doom the U.S. economy to a recession in 2024, according to DataTrek Research.
“U.S. bank stocks are the market’s Achilles’ heel just now,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Thursday. “If the bears are right and ‘something is going to break’ because of suddenly higher interest rates, then that ‘something’ will almost certainly involve U.S. banks.”
Shares of the SPDR S&P Regional Banking ETF
KRE
have plunged around 31% this year, while the SPDR S&P Bank ETF
KBE
tumbled about 21% over the same period, according to FactSet data, at last check. Both funds have dropped around 3% so far this month, exceeding the S&P 500’s decline of around 1% during the same stretch.
“At least U.S. bank stocks are not making new 52-week lows even as rates spike, but their recent momentum is pointing in the wrong direction,” said Colas. “Sentiment on this group is terrible, with dividend yields on most S&P 500 bank stocks signaling meaningful declines in earnings power over the next 12 months.”
The Federal Reserve’s rapid rate hikes to battle inflation led to stress this year for regional banks. In March, Silicon Valley Bank failed suddenly and the Fed announced an emergency lending program for banks to help ensure they could meet the needs of their depositors.
The recent surge in bond yields as investors appeared to adjust to the notion of higher for longer rates has renewed concerns over banks.
“If higher yields hit the value of a bank’s bond portfolio, it may need to raise more capital or sell at a distressed price,” said Colas. “If higher yields cause a recession, then loan losses will rise.”
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
has surged in 2023, trading around 4.71% in the early afternoon on Thursday. That’s after earlier this week climbing to its highest level since August 2007 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.
Mired in losses, the SPDR S&P Regional Banking ETF and SPDR S&P Bank ETF were each trading modestly higher Thursday afternoon, FactSet data show, at last check.
Beaten down U.S. bank stocks may be attracting bullish investors.
“If you are very bullish here, this is the group for you,” said Colas. For its part, DatraTrek leans “more to the cautious side on banks right now.”
When an individual stock’s dividend yield triples that of the S&P 500, which is now at 1.6%, then “as a rule of thumb,” said Colas, “you know the market is saying a dividend cut is coming and earnings power is significantly below what management and their board thinks it is.”
According to DataTrek, the market “rightly or wrongly” believes 11 of the 17 banks in the S&P 500 index may have to significantly cut their dividends, likely over the next six to 12 months. Colas prefers “to wait until Fed rate cuts are close at hand and dividend cuts have started.”
Meanwhile, the U.S. stock market was trading lower Thursday afternoon, as investors digested data showing initial jobless claims rose slightly less than expected in a still strong labor market. The Dow Jones Industrial Average
DJIA
was down 0.4%, while the S&P 500
SPX
fell 0.5% and the Nasdaq Composite
COMP
dropped 0.6%,
The S&P 500 remains up around 10% this year, after the index logged losses in September and August amid worries over higher rates.
