Stocks have shrugged off the banking turmoil. Haven’t they?

We all know the historical effects of a bank collapsing and how it impacts the economy. In March, we saw three banks fail. Bank failures directly impact businesses, as the banks tend to lend less and at a higher rate during times of uncertainty. This has a direct impact on economic growth and profits. 

In the past, we have seen huge stock dumps when banks have failed. Continental Illinois failed in May 1984, and the DOW took a substantial blow dropping nearly 6% during the month. Again, in September 2008, Lehman Brothers collapsed and stocks declined nearly 10%. The most severe case we have seen was during the Great Depression when numerous banks failed, resulting in a decline of nearly 89% between 1929 and 1932. 

We have seen three banks fail in March alone in our current economy. Historical trends would suggest that stock prices would decline drastically as a result. However, this has not been the case as the S&P 500 has increased by 4% and European stocks have increased by 3%. It is interesting to see this and it leads many to question why? 

There are various assumptions as to why investors and the market have responded the way they have. There is a belief that investors are betting on interest rate cuts. We have seen gains in stock prices for tech companies that are sensitive to higher rates, such as Apple and Microsoft. Overall, the Nasdaq rallied nearly 7% during March. Another significant factor in the current economy has been interest-rate derivatives. These investments allow investors to hedge risk and essential bet on where interest rates will go. These "swaptions" have allowed investors to protect themselves against expected interest rate changes. 

It will be interesting to see how the economy responds in the coming months and how investors respond.  Additionally, there is still uncertainty with interest rates as the Fed is still attempting its "soft landing" through incremental interest rate hikes. However, if market conditions worsen then we may see the Fed back off from their increases. Currently, we see that investors still have high hopes as overall stock prices and indices have increased over the past month. 

Source: Stocks have shrugged off the banking turmoil. Haven’t they?