Yahoo Finance The debt ceiling is just another problem for banks: Morning Brief
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With investors increasingly focused on debt ceiling negotiations, executives have begun to make more noise about the risks surrounding this debate when communicating with investors.
And no sector has been more vocal about these concerns than Financials (XLF).
In a note to clients published Monday, RBC Capital's Lori Calvasina flagged the following two charts, which show there were nearly 200 mentions of the debt ceiling by management teams in the Financial sector.
This was roughly double the number of mentions seen from the Industrial and Technology sectors, which were next up in terms of debt ceiling mentions on analyst calls and other investor communications.
That banks would be quick to warn about the risks of a debt default is backed up by how markets have behaved in the last 12 years of debt ceiling brinksmanship.
"In years where the drama in equity markets has otherwise been modest, the hits generally end up in the 5-6% area," Calvasina wrote. "In years in which debt ceiling drama has occurred in the context of other major problems in the market (i.e., 2011, 2015-2016, 2018), the hits have ranged from 10% to 19%."
And since 2011, the average decline in Financials during debt ceiling fights has been 8.7%, the most of any S&P 500 sector.
The problem with this stance, as Calvasina notes, is that stocks typically haven't skated through debt ceiling fights without a reaction. Rather, it is usually the action in stocks that engenders an eventual resolution from Congress.
That a further reaction in stocks may be needed to get action out of Congress will unpleasant news to investors betting on the Financial sector. Year-to-date, Financials are down over 6% with the S&P 500 up more than 7%.
On top of an ongoing bank crisis that has seen three regional lenders fail since early March, the debt ceiling is thus serving as just another pressure point for an already challenged sector.
Last week, JPMorgan's (JPM) CEO made headlines when he said a failure of Congress to raise the government's borrowing limit resulting in a US debt default would be "potentially catastrophic."
Notably, however, RBC's work shows that mentions of the debt ceiling among Financials surged at the beginning of the year, a few months before it became a daily topic of conversation in financial media.
Moreover, Calvasina noted that in conversations with clients in the US and Canada over the last two weeks, investors in North America were less worried than their counterparts in Europe over the risks of the debt ceiling fight.
"For the most part, these North American investors were far less concerned about the debt ceiling, with many reminding us that Congress always ends up getting a deal done," Calvasina wrote.
"Despite their level heads, by the end of last week debt ceiling concerns among these investors had started to rise as well."
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