What happened
After a brutal week for the sector, bank stocks rebounded today despite a hotter-than-expected jobs report. The SPDR S&P Regional Banking ETF had jumped roughly 6% as of this writing.
Shares of PacWest Bancorp (PACW), which has been under intense pressure, had blasted more than 82% higher as of 11:26 a.m. ET today. Meanwhile, shares of Comerica (CMA 0.38%) traded nearly 17% higher, and shares of KeyCorp (KEY 1.16%) were up nearly 11%.
So what
It has been a very interesting and bizarre week for bank stocks. After JPMorgan Chase's acquisition of most of the assets of First Republic, which had been seized by regulators, bank stocks began to sell off. This rout accelerated when media reports suggested that PacWest was exploring a sale and weighing its strategic options.
Image source: Getty Images.
But PacWest had really not seen abnormal deposit outflows. And not a lot seems to have changed since most banks reported earnings a week or two ago, which has driven many to believe that the sell-off might be overdone.
"With sentiment this negative, in our view it won't take much to see a significant intermediate-term favorable rerating of regional bank stocks," JPMorgan Chase analyst Steven Alexopoulos wrote in a research note this morning.
Analysts at the bank research firm Hovde Group added that this might be the exact time to try and catch a falling knife.
"The knife being caught presently could at least be dull," Hovde analysts wrote in a research note. "Given our view there is nothing new fundamentally occurring with bank system deposits (other than the already known movement from lower-cost sources), we believe investors could be handsomely rewarded."
The rebound by bank stocks also comes after the April jobs report was released this morning. It states that the U.S. economy added 253,000 jobs in April, more than the estimated 180,000. Furthermore, the unemployment rate tumbled to 3.4%. Both numbers indicate the job market is still quite healthy. Treasury yields surged on the news.
Earlier this week, the Federal Reserve raised its benchmark lending rate by a quarter point and indicated that it might be willing to pause its interest rate hiking campaign but that future moves would still be data dependent. This jobs report is not necessarily supportive of a Fed pause, although as of this writing, traders were still overwhelmingly betting in the futures markets that the Fed would leave interest rates unchanged at its June meeting.
Now what
It has been a bit of a backward week. Heading into this week, I would have suspected that JPMorgan's acquisition of First Republic's assets and the Fed's meeting would have lifted bank stocks and that the jobs report today would have hurt them, but the opposite has occurred.
Ultimately, I believe most of this week's selling pressure on the banking sector has been fear driven and not based on fundamentals. Banks do face real pressure this year on earnings and due to heightened regulation likely coming, but I think their stock prices and valuations reflect a lot of this.
While I think all three of these companies can rebound, Comerica and KeyCorp are more conservative plays and should be good long-term values at these levels. Things at PacWest seem to have stabilized as well, but the stock is clearly going to be more volatile, so investing in this one will require more risk tolerance and could result in a greater range of outcomes.
