VOO - Regional bank fears? Watch this key variable

2023-05-05 08:16:30 ET

Regional bank stocks are getting a breather Friday after tumbling in the previous session, but there are still big worries heading into the weekend.

The SPDR Regional Bank ETF ( NYSEARCA: KRE ) +2.5% and the iShares Regional Bank ETF ( NYSEARCA: IAT ) +2.3% were higher before the bell.

The action this week is a reminder that investors should be monitoring deposit flows out of U.S. banks and into money market funds, Christopher Wood, global head of equity strategy at Jefferies, says.

"In recent weeks there has been no decisive trend. But clearly there is a risk that outflows from banks pick up again," Wood wrote in his weekly Greed & Fear note. "Following the Fed’s latest 25bp rate hike on Wednesday, the reverse repo facility will now be paying 5.05%."

"Remember that 39% of money market funds are invested in this facility," Wood said. "For the record, US commercial banks’ deposits have declined by US$960bn or 5.3% since peaking in April 2022, while small regional banks’ deposits have declined by US$247bn or 4.4% since peaking in early December. As for US money market funds’ assets, they have increased by US$794bn or 17.8% since April 2022."

"The ongoing risk at regional banks, with the US regional banks index ( DJSRBK ) down 38% year-to-date means that the next Fed loan officer survey (SLOOS) will be critical to monitor ," he added."

A "hint of what may be to come was provided by the sharp decline in the availability of credit in the latest National Federation of Independent Business (NFIB) small business survey," Wood said. "Thus, a net 9% of small businesses reported in the March survey that their last loan was harder to get than previous attempts, up four points from February. This is the biggest monthly deterioration in loan availability since December 2002, even surpassing anything that happened during the subprime mortgage crisis."

Looking to the broader market, "the 2023 rally has become ever more narrow," Wood said.

"An updated chart from a recent report by Jefferies’ Microstrategy team shows that the top five stocks have contributed 80.9% of the S&P500’s ( SP500 ) ( SPY ) ( IVV ) ( VOO ) total return year-to-date," he noted. "The relative weakness of small caps, as reflected in the Russell 2000 Index ( RTY ) ( IWM ), also suggests weakening of the domestic economy ahead. The Russell 2000 Index has underperformed the Russell 1000 Index (large caps) ( IWB ) by 11% since 1 March."

Regional bank trouble - what to know

• Bank rout: Contagion fears, market manipulation or self-fulfilling prophecy?
• With FRC's collapse, here are the top 10 regional bank stocks, ranked by SA Quant Ratings
• Regional bank ETFs hit multi-year lows as PACW, WAL and FHN tank
• Western Alliance: Important Deposit And Liquidity Update

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