SUMMARY
- First Republic Bank collapse fuels investor fears, pushing financial stocks toward critical level
- Market could face more pain if financials index dips below 2007 peak
- Recession risks loom as banks could tighten lending amid stock market uncertainty
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It's been a wild ride for US bank shares, with stocks teetering on the edge of a dangerous technical threshold that could spell disaster for the broader stock market. The recent collapse of First Republic Bank has investors spooked, causing them to dump financial stocks, and pushing the S&P 500 financials index closer to dipping below its 2007 peak. It's been over a decade since the 2008 credit crash, but the ghosts of the past still linger.
Since January 2021, the financials index has managed to stay above the 2007 high, but falling through that level now could send a chilling message to the market. Hedge fund manager Jim Roppel, founder of Roppel Capital Management, explains that it could force banks to tighten their belts and cut back on lending, putting an already vulnerable economy at risk of recession after the Federal Reserve's sharp interest-rate hikes over the past 14 months.
Roppel notes that it's nearly impossible to sustain a bull market if bank stocks are plummeting, comparing it to an Olympic athlete trying to run with cinder blocks tied to their legs. But individual investors aren't giving up just yet – they were net buyers in shares of Bank of America Corp., Truist Financial Corp., and SoFi Technologies Inc., according to data compiled by JPMorgan Chase & Co.'s Peng Cheng.
However, Wall Street still frets that the ongoing turbulence among regional banks could lead to a tightening in lending. Traders are even betting that the impact could be so severe that the Fed will reverse course and ease monetary policy as early as July to stimulate the economy.
But not everyone is ready to dive back into bank stocks. Nancy Tengler, chief investment officer of Laffer Tengler Investments, advises against chasing these "falling knives," instead focusing on tech and consumer-related stocks that could benefit from dropping interest rates. Nevertheless, Friday's stock market rebound, fueled by a strong monthly jobs report for April, has helped alleviate some recession fears.
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