by Ralph Cole, CFA
Director Equity Research and Portfolio Management
A bank failure, a rate hike and a surprisingly strong jobs number all led to volatile equity markets this week, with negative returns led by energy stocks and regional banks. We’ll first discuss the takeover of First Republic bank, then the effect of the Fed’s actions mid-week. Finally, we’ll hit on the employment numbers for April.
First Republic Bank
As we have said before, this year’s bank failures have not emerged from credit issues. Rather, they have been driven by a crisis of confidence. JPMorgan Chase and its CEO Jamie Dimon led a group of banks that lent funds to First Republic in order to restore confidence in the once high-flying bank. While this worked for a while, investors became concerned, and it was only a matter of time before depositors would second these sentiments.
The FDIC has a duty to take the bid for a failed bank that insures the least amount of cost to taxpayers. JPMorgan’s bid was apparently the best choice. We think this acquisition is a great fit for Chase, and really adds to their high-net-worth franchise.
Is Powell Tone Deaf?
While many believe that it was unnecessary for the Federal Reserve to raise rates one more time by 25 basis points, that wasn’t what really drove the market later in the week. Fed Chairman Powell seemed to underplay the risks associated with many regional banks. He insinuated that the First Republic failure was seemingly the end of bank stress. To quote Lee Corso of Gameday fame, “Not so fast my friend.” Regional banks sold off drastically late Wednesday and again on Thursday before rebounding on Friday.
The order of events to step in and help depositors is interesting. Policy makers can only step in to subsidize rescue takeovers after a bank has been seized. This means equity holders will have nothing left, causing a race for the exits for investors that own regional banks. The run on the banks aren’t only deposits, but their stocks as well. This is a hard problem to resolve. Congress could help if they would increase the FDIC limit, but both parties appear to be leery of bailing out banks. Regional banks are an area that will likely continue to be volatile.
No Recession Yet
This morning, the Bureau of Labor and Statistics put out the April Jobs report. The U.S. economy generated 253,000 jobs in April, and the unemployment rate fell to just 3.4%. While this was perceived as good news for the market, wages continue to remain stubbornly high. Wages grew at a 4.4% year-on-year rate, which is still too high for the Fed’s ultimate inflation target of 2%.
Takeaways for the Week:
The Fed is probably done tightening for now, but regional bank issues remain a problem
With generationally low unemployment, and continued wage gains, a recession still appears a few quarters off