‘Head Fake Rally’? Dow Jumps 400 Points On Bank Stocks’ $37 Billion Recovery

Topline

A massive recovery for bank stocks led a broader market rally Tuesday as investors shook off their deepest concerns about the sector-wide effects from the failures of Silicon Valley Bank and Signature Bank, though several experts warn the resurgence may be little more than a dead cat bounce.

It’s been a busy few days for whipsawing bank stocks.

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Key Facts

The 10 largest American banks by market capitalization added $37 billion in market value as of Tuesday at 12:15 ET, partially wiping out their catastrophic $187 billion loss in the prior three trading sessions.

Among that group, the biggest gainers were Monday’s biggest losers Charles Schwab and Truist Financial, up 9% and 6%, respectively, as investors regained confidence in the firms.

The bank bounceback, combined with a solid inflation reading and Meta’s massive round of layoffs, helped the Dow Jones Industrial Average to a 410-point gain, or 1.3%, its second-best day of 2023, while the S&P 500 and tech-heavy Nasdaq tacked on about 2% apiece.

The rally comes even after Moody’s downgraded its outlook for the U.S. banking system from stable to negative, citing a “rapidly deteriorating operating environment,” and said late Monday it’s mulling credit rating downgrades for publicly traded regional banks Comerica, First Republic, UMB Financial, Western Alliance, and Zions.

But those banks, battered in Monday trading, joined in on the fun Tuesday, as each gained more than 7%, with First Republic’s nearly 60% recovery leading the way.

First Republic’s 73% stock crash between Wednesday and Monday was a “dramatic overreaction,” JPMorgan analyst Steven Alexopoulos wrote in a recent note, declaring the San Francisco-based institution his top bank stock pick.

Crucial Quote

It’s “as if there’s an ‘all clear’ signal throughout the market,” LPL Financial analyst Quincy Krosby wrote in emailed comments.

Contra

Sevens Report analyst Tom Essaye warned in a Tuesday note that the most recent market gains could be little more than a “head fake rally,” explaining that the Federal Reserve’s actions to protect depositors at Silicon Valley Bank and Signature Bank could actually cause inflation to linger even longer. The failures “exacerbate key headwinds” for banks already grappling with disappointed earnings, Morgan Stanley analyst Michael Wilson explained in a Monday note to clients warning against buying into bear market rallies driven by headlines rather than noticeable changes in bottom lines.

Key Background

Silicon Valley Bank’s failure Friday and Signature Bank’s forced closure Sunday marked the second and third-largest bank failures in U.S. history. Bank stocks big and small tanked late last week into Monday as investors fretted about the institutions’ financial health. JPMorgan received billions of dollars in deposits amid the failure-induced panic, according to Bloomberg, as Americans rushed to the country’s largest banks best positioned to safeguard their cash.

Tangent

Billionaire investor Ron Baron upped his stake in Charles Schwab on Monday as the brokerage giant’s shares tumbled, Baron told CNBC.