Investing in Bank Stocks: 5 Reasons Why Investors Are Selling
Bank stocks are selling off like crazy as investors dump both large bank and regional bank stocks in favor of safe havens such as cash, Gold and Silver, Bitcoin, and U.S. treasury bonds.
Some investors may consider buying the dip but I believe things will get far worse for the banking industry by Q3 2023. If you are wondering why investors are pulling back on banking stocks then here are 5 reasons why investors are dumping these stocks.
1. Fear of Losing Money
Fear is a powerful emotion that affects the stock market more than you think. When Silicon Valley Bank collapsed, depositors were afraid they would lose all of their money which caused massive bank runs all over Silicon Valley.
This caused investors to take a different look at bank stocks and realize that there were too many red flags to ignore. Once SIVB stock lost over 66% of its value in just 1 week, investors began selling bank stocks out of fear.
President Joe Biden reassured America that the banking system is fine but also mentioned that investors would lose all of their money because they took a risk.
Why lose your money in a bank stock when you can park it safely somewhere else? Fear and panic are driving the majority of bank stock selloffs right now.
2. Billions in Unrealized Losses on Most Bank Balance Sheets
According to WSJ, there are as many as 200 banks that could fail due to similar practices as Silicon Valley Bank and First Republic. This is why I listed selling bank stocks as one of the best investment strategies for 2023.
COVID-19 stimulus checks sent bank balance sheets to extremely high levels because Americans parked their money in the banks. However, the Fed kept interest rates at extremely low levels so banks invested their deposits into long-term bonds and mortgage-back securities to earn a higher yield.
Everything was fine until Fed Chair Jerome Powell began hiking interest rates at an aggressive pace. These Fed rate hikes caused the banks to generate billions in unrealized losses until those bonds and MBS reached maturity.
The problem is now people are withdrawing their money from banks and these banks don’t have the money to pay all depositors. Most banks practice fractional reserve banking, which means they don’t keep all of their deposits for safekeeping.
From a fundamental standpoint, banks have lost a ton of money and MOST IMPORTANTLY the trust of the American people. It’s one of the reasons why the SPR Bank ETF (NASDAQ: KBE) is down 20% YTD while Bitcoin is up 60%.
3. Future Fed Rate Hikes Will Compound Those Unrealized Losses
To make matters worse, Fed Chair Jerome Powell said he plans to increase the Fed fund rate several more times in 2023 to curb inflation. This effect has caused an inverted yield curve and now banks are losing even more money with every rate hike.
When the Fed fund rate increases, the value of bonds & mortgage back securities held by the banks goes down in value. If the banks hold onto these investments until maturity then everything will be fine. However, investors are realizing that deposits and profit margins are shrinking in the banking sectors and many don’t want to deal with the added risk.
4. The Credit Card Debt Crisis May Explode Soon
A record amount of Americans are living off of credit cards to pay their everyday expenses, which has driven credit card balances to over $1 trillion in 2023.
What happens if millions of Americans cannot pay off all of that principal and interest? Banks will be faced with tons of failed credit card repayments from bankrupt creditors.
These are massive losses for the banks that earn income from interest paid on credit cards. A lot of Americans won’t care about paying back the debt so this hurts bank profits margins over the next few quarters.
5. We Are Transitioning From Centralized Banking to Decentralized Cryptocurrencies
Once a business loses trust, it can be extremely difficult to regain it. A lot of people are turned off by the banking system and will opt for more control over their money. Cryptocurrencies such as Bitcoin and Litecoin give the owner 100% custody over their money 24/7 365.
It’s only a matter of time until people wake up and stop empowering the banks to gamble with their life savings. That’s why bank stocks are crashing while crypto stocks are soaring to the moon!
The Bottom Line
I expect many more bank failures in 2023 as the bigger banks bail out the smaller ones. Silicon Valley Bank was a significant inflection point in America’s banking sector and many people (both Americans and foreign residents) don’t trust our banking system anymore.
There are better sectors to target such as EV stocks, crypto stocks, REITs, and consumer staples dividend stocks that offer ROI without massive risk.
