Coming recession means more bad news for bank stocks, say traders

Mohit Oberoi
Author: Mohit Oberoi
Last Updated: May 18, 2020

The financial sector has been the second-worst performer in the S&P 500 this year after the energy sector, and the pain might not be over yet from a fundamental as well as technical perspective.

The financial sector has been among the worst affected due to the coronavirus pandemic. The KBE Bank ETF fell 135 last week. Federal Reserve chair Jerome Powell’s comments in an interview on CBS’s 60 Minutes on Sunday added to the gloom for US banks. Powell said he believed in the fundamental strength of the US economy, but added that an economic downturn might last until late 2021.

“It is tough to find the silver lining for banks right now, according to Mark Tepper, president of Milwaukee-based money manager Strategic Wealth Partners. “ I mean, you typically don’t want to own banks in a recession, and especially this recession, when there’s real long-term demand destruction. You know, our economy’s not going to snap back to 2019 levels quickly. It’s going to take some time.”

Tepper warned that in recessions commercial property firms often run up billions in deafults to banks on finance loaned for building projects. He said: “All of that means small businesses are going to have to negotiate lower lease rates, then that’s going to cause the commercial real estate owners to negotiate with the banks and, what do you know? In the end the banks are left holding the bag once again.”

Banking stocks aren’t looking pretty from a technical trading perspective as well. According to JC O’Hara, chief market technician at MKM Partners said: “When we look at the KBE S&P 500 banking ETF, it screams that there is zero appetite for banks by market participants.”

He added, “The largest concern of ours, with this ETF [exchange-traded fund] is it’s actually trading at a 52-week relative low versus the S&P. So for us, we want to avoid this area. We’d rather stick with stocks that are moving higher than stocks making new relative lows.”

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Mohit Oberoi

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.

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