Navegó a una página que no está disponible en español en este momento. Seleccione el enlace si desea ver otro contenido en español.

Página principal

Institute Alert: Stay defensive as bank sector comes under pressure

Wells Fargo Investment Institute - March 12, 2023

by Paul Christopher, CFA, Head of Global Investment Strategy; Chris Haverland, CFA, Global Equity Strategist; Mark Steffen, CFA, CAIA, Global Alternative Investment Strategist

Key takeaways

  • Two bank failures late last week likely will raise questions about some small- and mid-sized banks to start the new week.
  • What is notable about the two failed banks is their overexposure to assets whose values come under pressure as interest rates rise and their concentrated business models. However, we view systemic risk to the overall banking industry as low, because most banks are well capitalized and have more diversified balance sheets.

What it may mean for investors

  • We maintain our neutral rating on the Financials equity sector and reiterate the specifics of our defensive portfolio allocation posture, in place since February 2022.

At the end of the week, two banks failed. Unlike most banks, these two had concentrated business models with a focus on assets with expected payoffs long in the future — i.e., long-duration assets.

Deposit flows into banks were strong over the 2019-2021 period, and some banks came to specialize in investing the money in assets such as long-dated U.S. Treasuries and mortgage-backed securities — all long-duration assets whose values have declined on paper since interest rates have risen. Higher interest rates have another effect. As depositors come in looking to transfer their funds to higher-paying money market rates, some banks must sell their long-duration assets to raise cash for depositor withdrawals. These sales recognize losses that previously had only been on paper. Some banks will be obliged to write-down capital, but we do not believe this problem affects the banking system as a whole.

For the overall economy, it is important to note that household and corporate balance sheets are in much better condition today than they were in 2007 – 2008. Federal Reserve (Fed) data shows that corporate debt as a share of net worth in the fourth quarter of 2022 was 41.6% and falling, compared with 46.9% in fourth quarter of 2008. For households, the ratio of loans to net worth has fallen to 13.2% from 24.3% over the same period.

Maintaining a neutral rating on the Financials sector of the S&P 500 Index

The Financials sector is diversified, with roughly one-third weighting in banks, 21% in insurance, and the rest in diversified financials. The large banks represented in the sector are well-capitalized and have passed rigorous stress tests administered by the Fed. Most have been setting aside reserves to cover potential losses that may occur in a recession. As financial conditions have tightened, loan growth has remained steady. However, even with higher rates, net interest margins have fallen below pre-pandemic levels. Capital market activity has weakened considerably in areas such as initial public offerings, debt issuance, and mergers and acquisitions.

The Financials sector is highly cyclical, and we downgraded the sector to neutral in 2022, anticipating an economic slowdown. Performance of Financials has slightly lagged the S&P 500 Index over the past five months. Historically, the sector has been a market performer as the economic cycle ages, the Fed tightens monetary policy, and short-term interest rates come to exceed long-term rates.

A quick check on private equity and venture capital

Many of the deposits of the failed bank appear to be venture capital firms, and some may suffer deposit losses. We continue to maintain our current guidance as neutral for Private Equity – Venture Capital strategies. On the positive side, our longer-term view of the asset class looks through the economic uncertainties of this year. Current vintage funds typically invest committed capital over the next three to five years, a time frame that we expect to include a sustained recovery in economic growth and lower interest rates. For the immediate present, however, the venture capital industry should continue to experience slowing deal activity, declining valuations, and a restrictive exit environment for venture holdings, as start-up businesses adjust to current market conditions and the current elevated interest rate regime. We view these longer-term positives and shorter-term negatives in a balance, for a neutral stance.


Up to this point, we are maintaining the defensive posture we have held since February 2022 across equities and fixed income. We have been saying for the past year that rising interest rates, falling money supply growth, declining bank reserves, and tighter liquidity conditions across the Financials sector are all working to quell inflation, but at the cost of a slower pace of economic activity. As we wrote on March 2, the equity markets are likely to trade in a range. In fact, the S&P 500 Index has traded in a wide band since April 2022 and, similarly, the 10-year U.S. Treasury note yield has traded in a range since September 2022. We reiterate our view and our main investment preferences from March 2. Some specific implications of our view include the following:

  1. In fixed income, we favor a “barbell strategy,” that is, overweighting positioning in short- and long-term maturities. A barbell should take advantage of high short-term rates and attractive long-term yields that we have not seen in multiple decades.
  2. Fixed-income sector positioning should be more defensive, and we favor moving up in credit quality.
  3. We do think the environment is improving for international fixed income, and international equity opportunities could arise as 2023 progresses.
  4. Several highly cyclical areas of the market found their footing early in the year, but we believe that declining earnings have not been fully priced in the majority of cyclically oriented sectors. Thus, we still favor quality sectors (Information Technology, Health Care, and Energy) when their risk-reward balance becomes more attractive, at or near the lower end of their trading ranges.
  5. Commodity prices are below their 2022 highs, but we expect gains from current levels, as the economic recovery gains momentum. And, especially for long-term investors, the supplies of raw materials are likely to lag strong demand growth, while countries around the world replace and improve infrastructure. Upward pressure on commodity prices should continue beyond 2023, and we favor building exposure into a multi-year position in portfolios that may still be underexposed.

Download the report (PDF)