Fears of fragility in the U.S. banking sector are spreading.
Regional bank stocks continued tumbling Thursday; shares of PacWest and Western Alliance were halted more than once. The SPDR S&P Regional Bank ETF (KRE) fell 5.5%. At one point on Thursday, every stock in the KRE traded lower as investors sold off regional banks.
It's not just investors who are worried about banks' health. Consumers — many of whom do not trade stocks — share the same sentiment. A Gallup survey found that half of respondents polled were "very worried" or "moderately worried" about the safety of their bank deposits — a proportion last seen during the 2008 financial crisis.
Against such a backdrop — and fresh off a quarter percentage point rate hike by the Federal Reserve on Wednesday — markets, unsurprisingly, didn't do well. The Dow slid 0.86%, the S&P 500 lost 0.72% and the Nasdaq fell 0.49%. That's the fourth consecutive day all major indexes fell.
But some analysts and bankers think the tumult is caused by fear more than analysis. (Though this is not to argue against the idea markets are, largely, driven by psychology.)
Evercore ISI's John Pancari, for instance, wrote the advisory firm is confident about the "liquidity and capital levels at banks post 1Q." Indeed, PacWest said its deposits grew $1.8 billion from March 20 to April 24; Western Alliance also reported that its deposits have increased since the end of March.
But Pancari warned bank valuations could still collapse because of a "self-fulfilling prophecy," where investors, fearing the collapse of banks, actually trigger the process as they flee.
Or, as Peter McGratty, head of U.S. bank research at KBW, put it, "We're in this situation that feels a lot like March, where we're trading stocks on fear … not fundamentals." And that's particularly scary today, when SVB's failure in March showed how fears can spread near instantly on social media and cause a bank to collapse in merely 36 hours.
