The bank panic of 2023 refers to a sudden and widespread loss of confidence in the banking system, which led to a rush of withdrawals by depositors and caused many banks to fail or merge. This panic had a significant impact on the stock market, as investors became worried about the stability of the financial sector and the potential for a broader economic recession.
As with many economic crises, the stock market’s initial reaction to the bank panic was negative, with many stocks experiencing sharp declines in value. However, history has shown that the stock market’s typical pattern in response to such crises is a plunge followed by a quick recovery.
This pattern is often driven by a combination of factors, including the implementation of government policies aimed at stabilizing the economy, the resilience of the private sector, and the natural tendency of markets to rebound over time. While the bank panic of 2023 may have initially caused significant disruptions in the stock market, many experts believe that it is likely to follow this typical pattern and recover relatively quickly, potentially providing an opportunity for investors to make money once again.
Past banking panics and the stock market’s reaction
To understand how the stock market might react to the bank panic of 2023, it is useful to examine past banking panics and their impact on the market. The database compiled by Matthew Baron, Emil Verner, and Wei Ziong provides a comprehensive look at banking panics in the United States since 1870, and their analysis reveals some interesting trends.
On average, the stock market’s post-panic low was hit within two months of the panic’s onset. However, within an average of just five months, the S&P 500’s total real return index was higher than where it was prior to the panic’s onset. At the one-year anniversary of the panic, the index was 8.0% higher, on average.
These averages mask considerable variation from panic to panic. For example, the panic triggered by the collapse of Lehman Brothers in September 2008 took the S&P 500 six months to finally hit its low, and more than an additional year for the S&P 500 to be higher than where it stood prior to the panic’s onset.
Nevertheless, the overall averages suggest that a “plunge followed by quick recovery” is the typical pattern for the stock market’s reaction to economic and geopolitical crises, not just banking panics. This pattern is often driven by a combination of government policies aimed at stabilizing the economy, the resilience of the private sector, and the natural tendency of markets to rebound over time.
Anticipated timeline for the stock market’s recovery
Based on historical patterns, it is possible to anticipate a timeline for the stock market’s recovery following the bank panic of 2023. Analysts predict that the S&P 500 will hit a low point sometime in April or May 2023. After that, they expect a strong rally that will eclipse the market’s early-March levels by the end of the summer. By March 2024, the market is predicted to have made a double-digit gain in nominal terms over where it stood recently, reflecting the average one-year post-panic return of 8% real, plus inflation.
It is important to note that these predictions are based on historical patterns and averages, and there is no guarantee that the stock market will follow the same trajectory in the wake of the bank panic of 2023. However, they provide a useful framework for investors looking to make informed decisions about their portfolios in the coming months.
Advice for investors during a panic
One important piece of advice for investors during a panic is to avoid selling into the downturn. Historically, investors who sell during a panic tend to get highly unfavorable outcomes, as they miss out on the rebound that typically follows. Instead, it is often best to hold on for the anticipated recovery.
While it can be tempting to panic and sell assets when the market is in turmoil, this can lead to significant losses and missed opportunities for gains. Instead, it is important to maintain a long-term perspective and remember that market downturns are a normal part of the investing cycle. By staying patient and riding out the panic, investors can position themselves to benefit from the market’s eventual recovery.
Possibility of the stock market following a similar script in 2023
In light of the historical data, it is possible that the stock market could follow a similar pattern in the wake of the bank panic of 2023. As per the analysis of past banking panics, the S&P 500 could hit a low point sometime in April or May, after which it could experience a strong rally. By the end of the summer, the S&P 500 could even surpass its early-March levels, and by March 2024, it could have a double-digit gain in nominal terms over where it stood recently.
However, it is worth noting that the average one-year post-panic return of 8% real, plus inflation, reflects considerable variation from panic to panic. The most recent banking panic in September 2008 took the S&P 500 six months to hit its low, and more than an additional year for the index to surpass where it stood before the onset of the crisis. Thus, while historical data suggests a potential recovery, it is important to consider the unique circumstances of the current banking crisis and exercise caution.
Conclusion:
In conclusion, the bank panic of 2023 could be just what the stock market needs to make money for investors again. Based on analysis of past banking panics, it is likely that the stock market will follow a similar script in the wake of the current crisis, with the S&P 500 hitting a low in April or May and rallying strongly thereafter, leading to a double-digit gain in nominal terms by March 2024. While there may be considerable variation from panic to panic, the typical pattern of a plunge followed by a quick recovery is the stock market’s reaction to economic crises. Therefore, it is encouraged that stock market investors hold on for the anticipated recovery instead of selling into a panic. Mark Hulbert’s Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited and can provide valuable insights to investors. However, it is important to note that the end of the “everything bubble” has finally hit the banking system, and Credit Suisse and SVB might be just the first of many shocks.