There’s no getting around it: It’s been a downright disastrous week for the banking sector.
The Silicon Valley Bank catastrophe, which I spoke about in depth on Tuesday, led the majority of headlines earlier this week. SVB had collapsed in a hectic 48 hours, during which customers pulled their deposits from the institution. At the time, it was the 16th-largest commercial bank in the U.S.
Now, it’s the second-biggest bank failure in U.S. history.
Volatility spread across the market in the aftermath of the downfall, with ripples of uncertainty in financial stocks carrying far and wide, and just as the markets seemed to settle, news of Credit Suisse Group AG (CS) having its own issues crashed the market again.
I know folks are worried, so I’d like to use today’s Market 360 to explain what happened with Credit Suisse as well as the European Central Bank’s subtle response. And then, I’ll share where you should invest now.
The Banking Contagion Hits Europe
On Wednesday, Credit Suisse revealed that it found “material weakness” in its financial reporting for 2021 and 2022. The bank disclosed that “management did not design and maintain effective controls over the classification and presentation of the consolidated statement of cash flows.”
Shares of CS dropped over 24% to a record low following the news, after having fallen earlier in the week in response to the collapse of Silicon Valley Bank.
To make matters worse, Saudi National Bank, Credit Suisse’s largest investor, announced it will not offer financial help to the Swiss bank. This is because SNB holds a 9.9% stake in Credit Suisse and, as SNB Chairman Ammar Al Khudairy said, “We cannot [provide assistance] because we would go above 10%. It’s a regulatory issue.”
Luckily, the Swiss National Bank stepped in and offered a loan up to 50 billion francs, or $53.68 billion, on Thursday.
But not before the Swiss bank’s fall caused a wider banking selloff through the rest of Europe. French banks BNP Paribas and Societe Generale and German banks Commerzbank and Deutsche Bank also posted steep declines on Wednesday. By the end of the trading day, the entire banking sector fell 7%. This is the sector’s worse trading session since Russia launched its invasion of Ukraine on February 24, 2022.
As I mentioned on Tuesday, those who followed my Portfolio Grader would’ve known to stay away from Silicon Valley Bank long before it’s implosion this past week.
And the same holds true for Credit Suisse.
CS has been considered a “Sell” for most of last year. In fact, it fell to an F-Rating, my lowest score, last summer. It has consistently stayed at an F-Rating since last December.
So, even before the company’s downfall this week, I would not have touched it with a 10-foot pole. Those who had followed my Portfolio Grader would’ve known to stay far away from the bank, too.
The European Central Bank Hikes Rates
Also important to mention, the European Central Bank met on Thursday and announced a rate hike of 50 basis points. Their key interest rate is now at 3%, up from 2.5%. In the ECB’s previous rate hikes, it has made statements that it’s going to significantly raise rates. Following the Credit Suisse debacle, that statement has disappeared. So, they may be ending their rate hikes soon.
Just like the Federal Reserve, the ECB remains focused on inflation. In a statement, the ECB cited inflation remaining “too high for too long” across the 20-member region as the reason for the hike.
The ECB continued:
The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions.
In my opinion, the Treasury Department, Swiss National Bank, and the European Central Bank should have come out with a join statement that they would provide liquidity to all of the banks, but that’s just me.
It is very clear that the banking crisis in Europe is much worse than it is here in the U.S: If European banks continue to struggle, it could trigger a recession across the continent. The U.S., on the other hand, should be able to skirt a recession.
While the recent bank crisis made many investors run for the hills, that doesn’t mean that you should join them. Instead, I recommend using the pullbacks to scoop up shares of fundamentally superior stocks on dips. Good stocks will always bounce back like “fresh tennis balls.”
If you’re not sure where to find those stocks, then consider my Growth Investor service. At Growth Investor, we’ve loaded up on companies with accelerating earnings and sales momentum set to prosper in the current environment. And if you become a member, you’ll get full access to my two Buy Lists: High Growth Investments and Elite Dividend Payers, as well as access to my Top Stocks and latest recommendations.
And stay tuned! Right now I see TWO massive economic events on the horizon – events that the mainstream media is ignoring. I’ll have full details for you soon, so keep a close eye on your inbox.
Editor, Market 360
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