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Stocks are fending off bank turmoil. That’s not it?

B.failure of the ankh It usually has a negative impact on business. A sickly banking system lends less to companies in need of capital, at higher interest rates. A credit crunch hampers economic growth and thus squeezes profits. In some cases, rogue banks can bring down the financial system and cause a streak of pain.

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Investors know this. They sold off stocks when banks failed earlier. In May 1984, the month when Continental, a major Midwestern bank, collapsed and was bailed out by the Federal Reserve, the Dow Jones, then the leading index of U.S. stocks, fell 6% of his. bottom. When investment bank Lehman Brothers collapsed in September 2008, his stock fell 10%. During the Great Depression, the stock market fell 89% from his high in September 1929 to its low in July 1932 as bank after bank failed.

Things are different this time. In March, three of his American banks collapsed, draining deposits from smaller financial institutions across the country. Regulators forced the 167-year-old Swiss bank into a hasty alliance with a larger rival.nevertheless s&p The 500 index of US stocks rose 4%. This is an impressive return well above the long-term monthly average of around 0.5%. The cheers weren’t confined to America, either. European stocks he rose 3%.

The most gratifying interpretation of these events is that the collective wisdom of the markets has surmised that the danger is over. Expanded emergency lending facilities for banks. Inferring investor thinking from market movements is more art than science. But is this really what people think?

Probably not. First, it’s clear from interest rate market movements and different stocks moving in different directions that investors aren’t betting that everything will be fine for the banking sector and the economy. They are betting on rate cuts. The reason the broader stock index rose was that the companies most sensitive to rising interest rates — tech giants including Apple and Microsoft — rose, offsetting falls in banking and financial stocks. Prices trailing the index south. This is most evident from the performance of his Nasdaq, a tech-related index, which he rose 7% in March.

Second, retail investors, who tend to go crazy when markets are most active, seem to be on the sidelines. Retail deal flows have been on the rise since early 2021, when the retailer’s enthusiasm for GameStop sparked the enthusiasm of a huge number of private investors. Those traders piled up stocks earlier this year, netting a record $17 billion in stocks in his first two weeks in February, according to data provider Vanda. However, their activity collapsed along with Silicon Valley Bank. In his last two weeks in March, the net amount that individuals purchased stocks was just his $9 billion, the lowest amount since late 2020.

The third is what’s happening with “swaptions” or interest rate derivatives. These allow investors to make long-shot bets on what will happen to interest rates. This is used by many as a form of portfolio insurance. Wrong wrong. In early March, the swaption market was balanced. Investors invested as much to bet that the Federal Reserve (Fed) would raise rates above his 6% rate by the end of the year to bet that he would cut interest rates below 4%. I paid the amount. But now investors are paying to protect themselves from doomsday scenarios. The cost of buying a derivative that would pay if the Fed “surrendered” (cut rates by about 2% by December) would be the same as buying a derivative that would pay if interest rates rose above 6% is twice as large as

All of this shows the anxiety masked by the buoyancy of the headline stock. Towards the end of the tightening cycle, investors tend to adopt a “bad news is good news” mentality, and signs of economic trouble are counterintuitively on their side. Limit rate increases (or even cut rates). But the waning enthusiasm of retail investors, and their eagerness to insure against catastrophe, is a reminder that this string of bad news could directly turn into bad news. It means that you are still concerned. Rising stock prices show that investors hope for the best. Activity elsewhere suggests they are also preparing for the worst.

Read more from financial markets columnist Buttonwood:
Did Social Media Cause Bank Panic? (March 30)
Why Markets Can’t Be Truly Safe (March 23)
Reasons why products shine in the age of stagflation (March 9)

Also: Buttonwood row method got that name

https://www.economist.com/finance-and-economics/2023/04/05/stocks-have-shrugged-off-the-banking-turmoil-havent-they Stocks are fending off bank turmoil. That’s not it?

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