The bank crisis that defined the start of spring this year had wall to wall media coverage, financial news watching each update with bated breath expecting each turn to drive the economy off a cliff. What happened instead was pretty tame, by comparison — a few banks have fallen and depositors moved away, but the whole economy didn’t stop. That’s part of a recent piece of insight about bank failures from Richard Bernstein Advisors (RBA) about why it’s important to stay focused on fundamentals.
Yes, First Republic Bank (FRC) did meet its end this week, and there might be a lending chill among other banks, but the histrionics that defined the hour-by-hour coverage in March haven’t delivered. That’s because at the end of the day, markets have seen bank failures like this before, per RBA.
According to CEO and CIO Richard Bernstein, the Silicon Valley Bank (SVB) situation in some ways reflects the 1984 failure of Continental Illinois, which, like SVB, was overextended into a particular type of loan — energy, rather than SVB’s tech loans. Continental’s struggles then were also preceded by the Fed tightening rates to curb inflation, with the FDIC also responding to protect depositors.
RBA itself looked to get ahead of regional bank troubles last year, Bernstein notes, because of the yield curve’s inversion. While some investors may see an inverted yield curve as just an indicator of future nominal economic growth, it’s more than that, Bernstein explains: the slope of the curve impacts bank lending.
“Yield curves are more than simply indicators; they are policy tools,” Bernstein noted.
With bank loans’ profitability tied directly to the curve’ slope, RBA moved to a significant underweight when it inverted last July and reduced regional bank exposure. That commitment to macro-focused fundamentals in RBA’s profits cycle-driven research helped the firm move away from those banks.
By adding RBA’s focus on investor sentiment, it appears investors and managers know that bank stocks are out of favor already and risks are well known — should that be the case, once fundamentals improve it could be worthwhile to increase a weight towards the sector.
For those intrigued by RBA’s research, it may be worth considering how it is packaged and used in the iMGP RBA Responsible Global Allocation ETF (IRBA), which actively invests in other, passive ETFs to craft a bespoke allocation to sectors RBA believes will benefit from either accelerating or decelerating profits. With bank failures offering a lesson in the value of indicators and the need to invest based on long term fundamentals, IRBA and RBA’s other strategies could be worth watching.
For more news, information, and analysis, visit the Richard Bernstein Advisors Channel.