To The Moon

US debt ceiling crisis is almost a done-deal.

On Thu, 01 Jun US Senate has passed the Bill with a voted 63-36 to approve the bill that had been passed on Wed, 31 May by the House of Representatives.

All that is left is for President Biden to finalize the bill with his signature.

With that, US narrowly escape averting what would have been a first-ever default.

S&P 500 index - past 5 days performance

US market was confident that the Debt limit issue will be resolved.

They have been trading “sideways” with an uptrend momentum. When the bill is eventually signed, market should remain “positive” and continue to trend upwards but shouldn’t be expecting a spike.

Every investor will be “praying”, hoping that bank stocks will be able to “recover” with the debt limit crisis averted. Will it?

Stripped of human emotions, I think the following 4 factors will determine a bank’s “fate”:

• Macroeconomic scenarios.

• Regulatory environment.

• Competition landscape, and

• A bank’s' strategies & capabilities.

Personally, I think there will be some way to go before the Financial sector recovers.

For starters, the Treasury Department will be racing against the clock to bulk up its account, get it ready to disburse all the payments slated between 01 Jun to 15 Jun.

Credit tightening has already “heightened” during Mar 2023 banks’ runs and again on the run up to $First Republic Bank(FRC)$ finally collapse, and absorbed by $JPMorgan Chase(JPM)$.

The banking sector is trying hard to present a united front, but things are far from rosy.

Bank deposits were still flowing out of the banking systems with many fearful of another bank run. Until all outflow stopped, only then could recovery begin.

With credit tightening it would also mean businesses seeking loans may fail to get the credit needed for business creation or expansion.

This would affect a bank’s ability to generate “profit”.

Counterbalance “to stem” profit-loss generation, would be to cut expenses.

These 2nd wave and 3rd wave layoff all happened within Q2 2023.

I think every reader gets the point that I am trying to convey. Right?

Nasdaq Banking Index - Year To Date

Finally if we look at Nasdaq’s YTD Bank Index, it has fallen by -28% since 01 Jan 2023.

The steepest plunge occurred in Mar 2023 (bank run), followed by a smaller fall in May 2023 (US debt limit).

• The probability of US slipping into recession within the next 12 months remains elevated.

• 99% probability

• Economic weakness will continue to intensify and spread throughout the economy.

• Coupled with the Fed’s readiness to hike terminal rate at least 1 or 2 more times, this would be the nail to the coffin.

With all the “gloom” and “doom” that lies ahead, is it any wonder that Banks will not do well in the short term?

What an investor does next will depend on his/her long-term view and strategy :

• Buy at regular interval.

• Monitor like a hawk and buy when price dips.

There isn’t a one size fit all solution. Find the one that suits your needs best!

• Do you think Bank stock will continue to fall ?

• Do you think US will slip into recession, further curtailing bank stocks recovery?

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