US banks are failing left and right and today marked the acquisition of First Republic Bank by JP Morgan, the second-largest banking failure in US history. We have witnessed a lot of issues with the banking sector in recent months, and market participants are taken aback by where the US equities market is trading. Their concern is: why aren’t we witnessing widespread panic in the stock market, and why is the US stock market still so resilient?
Background
First Republic Bank has been bought by JP Morgan, which many traders thought would not happen this weekend. Traders and investors did not anticipate JP Morgan to acquire First Republic, given that it already controls 10% of US depositors’ funds. In the aftermath of the 2008 financial crisis, a regulation was implemented to prevent the domino effect of becoming too large to fail. Regulators at the time enacted an important legislative provision requiring no bank to hold more than 10% of US depositors’ money.
Going into the weekend, it was expected that Bank of America or PNC would win the offer to acquire First Republic Bank, while Berkshire Hathaway chose to remain on the sidelines, maybe because it wasn’t the greatest deal for them. In general, Berkshire would leap into transactions like these, as it did following the 2008 financial crisis, and increase its holding in a number of large US banks. Nonetheless, the acceptance of JP Morgan’s bid has jeopardised the “too big to fail” legislation.
What Caused the Collapse?
The failure of First Republic Bank was mostly caused by ultra-high US interest rates and a lack of adequate capital requirements imposed by regulators. These factors contributed to the failure of SVB and Signature Bank in the United States. The Fed will not modify its monetary policy position, notwithstanding the failure of First Republic Bank, whose 84 offices now retain the JP Morgan moniker. The Fed is still anticipated to raise interest rates by at least 25 basis points this week, ahead of Friday’s US employment report.
The Issue
Investors are afraid that if the Fed continues to raise interest rates as expected, what will happen to the US financial system’s other problem children? There is no guarantee that the Fed will stop raising interest rates after this meeting, given inflation is fairly sticky here. After this week’s meeting, we’re likely to see at least another rate hike.
The Reasons Why the US Stock Market Is Still Rising
The remarkable thing about the recent collapses of US banks is that the US stock market has rallied in the wake of all of them. For example, when Signature Bank failed, US share markets soared. The US equities market skyrocketed once the SVB folded its cards. When Credit Suisse went bankrupt in Europe, the US stock market rose even more. Today, we also see optimism among risk takers, while investors are perplexed.
For them, bank failures inevitably signal further difficulties, and the domino effect will cause even more massive issues for the US stock market.
The reason we are seeing the US stock market rocket is because traders have begun to pay more attention to the vitality returning to the US tech industry. Over the last week, we’ve seen US tech behemoths report better-than-expected results. There are less fears regarding their future EPS, and their situation has improved.
Furthermore, Apple will be reporting earnings this week, and another stellar report from Apple may only encourage risk-takers to support the equity markets even more. Furthermore, the composition and structure of the S&P 500 index have shifted, and it now depicts a more optimistic picture when tech and energy behemoths perform well. Last week, the oil industry provided some great figures, and this week we will hear from Shell, which I anticipate to outperform its predictions.
To summarise, traders feel, rightly or wrongly, that the US IT industry is more crucial since the present crisis is essentially ongoing and idiosyncratic circumstances are unlikely to erupt into Armageddon.
