Banking I: Disintermediation 2.0?
The bear case last year was that the Fed would have to tighten monetary policy aggressively because the Fed was behind the inflation curve and had to scramble to catch up. That would cause a recession, which is the only way to bring inflation down, according to the narrative. As a result, valuation multiples would tumble, and so would earnings.
That scenario played out well for the bears as the S&P 500 dropped 25.4% from January 3 through October 12 of last year. However, the bear market was mostly attributable to a 29.8% plunge in the S&P 500’s forward P/E (Fig. 1). Forward earnings actually rose 6.2% during the bear market because the recession didn’t happen as expected by the bears (Fig. 2).
Nevertheless, they are still growling. A recession is still coming, and it will depress both the valuation multiple and earnings, they claim. The forward P/E is up from 15.1 on October 12, 2022 to 17.5 last Friday, but it is likely to fall down to single digits in the bears’ scenario. They’re saying S&P 500 earnings could fall 15% to $185 per share this year, down from $218 last year.
The banking crisis that started when the FDIC seized Silicon Valley Bank (SVB) on March 10 will cause the credit crunch that causes a recession this year, the bears contend, and sooner rather than later. Money will pour out of bank deposits into safer Treasury securities that are yielding more than deposits. Banks will be forced to sell their underwater bonds. They’ll be forced to stop lending, resulting in a credit crunch. Credit crunches attributable to disintermediation have always caused recessions.