AAPL - Senior Loan Officer Survey: Bank-Led Recession Ahead?

2023-05-09 08:59:26 ET

Summary

• Regional bank turmoil started after a softening willingness of banks to issue loans.
• Such strictness of lending has preceded a recession every time it has happened since the 60s.
• Small business survey also suggesting a recession by historical standards.

Ever since Silicon Valley Bank ( OTC:SIVBQ ) failed, concern has risen that regional bank lending would be pressured as deposit bases destabilized. This concern is well-placed and supported by the data.

The Federal Reserve releases the SLOS (Senior Loan Officer Survey) once a quarter. It released an update today (May 8th). The Net % of respondents reporting tightening lending standards came in at 46 for large and medium companies and 46.7 for small businesses. Both of these numbers are higher than Q1, but both statistics in Q1 were already at levels that have preceded recessions with the exception of 2020 (which was obviously an awkward year).

Here is the chart for small businesses.

Here is the chart for large/medium businesses.

A similar result of the survey is the net percentage of banks more willing to make loans than less willing to make loans. A negative number indicates less available credit and negative results in this survey have preceded recession every single time since the 60s. As you can see below, this number was already negative by Q1 results that were published in January.

Lower credit availability correlates to small business optimism as well. Small business sentiment is important as small businesses are responsible for nearly half of all US employment, >61 million according to Forbes.

Loan availability also correlates with corporate revenue growth. Therefore, it should surprise no one that lower corporate revenues from tighter lending standards also leads to lower S&P earnings.

As you can see in the gray bars above, the declining loan availability preceded S&P earnings declines by a short amount of time.

Conclusion

I wrote about my concerns over less bank lending last month in "Life After Silicon Valley Bank: Tighter Lending Conditions" . I didn't appreciate at the time that lending was already shaky to the level where recessions have appeared in the past. Despite a relatively solid earnings season for Q1, I continue to fear a difficult economic and corporate earnings backdrop for the remainder of the year and possibly into 2024. Year to date, Apple ( AAPL ) and Microsoft ( MSFT ) are responsible to 2% and 1.64% of the S&P's 8% performance. In other words, the S&P would be up 4.66% without those companies. While they have had excellent results, their multiples have also expanded. In that light, plus tighter lending standards and a potential debt limit fight, I recommend treading carefully and consider some shorts or market hedges.

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