LABJ Stock Index: April 10

The Broad Markets Have Shaken Off A Lot of the Bank Worry

When central banks hike interest rates and tighten the flow of credit to the economy, things tend to break. Different parts of the economy tend to break at different times — and this cycle has already seen corrections in housing, manufacturing, and tech. Now, it’s banks, which can feel especially bad, given their place at the epicenter of the economy. While markets seem keen to move on, we likely haven’t seen all of the aftershocks. 

Based on what we know now, this episode doesn’t look systemic, and it doesn’t look like another 2008. 

However, the cracks are evident, and as investors we’re focused on sizing up the impact. 

Are there signs of contagion? 

The recent shock has left bank customers questioning how safe cash is in their checking and savings accounts. That worry has sent deposits rushing out of small banks and into both large banks and money market funds, which have seen their largest inflows since early in the pandemic, bringing their total assets to over $5 trillion (the most on record). If this trend accelerates, and all depositors demand their money back at the same time, this can put banks in a tough spot. 

There are promising signs that some of the worry is abating. While banks have tapped the Fed and other sources of liquidity, this borrowing seems to be decelerating (albeit remaining elevated), suggesting that liquidity strains aren’t getting worse. Banks are tapping liquidity from the Fed, but the rate is slowing. 

What other pressures are lurking? 

To keep deposits in the door, banks may be forced to offer higher rates that compete with other banks and money market funds. They also may be more reticent to lend in an uncertain environment. All of this cuts into profitability — and the upcoming earnings season should provide an initial sense of these challenges.

The bank shock has highlighted gaps in existing regulations. Moving forward, regulators will likely take a stricter approach to current rules, as well as introduce new ones. 

We are focused on investments that are more defensive and can offer protection in a downturn. Above all, stick with your investment plan. History suggests that this too shall pass, and investors are less likely to suffer losses over longer periods — especially in a diversified portfolio.

Rick Barragan is the managing director, Los Angeles market manager, for J.P. Morgan Private Bank.
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