A new banking crisis has emerged in recent weeks…
It’s different than the 2008 financial crisis. History isn’t repeating. But it seems to be rhyming once again.
The current catastrophe began with California-based Silvergate Bank… the main bank in the cryptocurrency industry. The crisis hit Silicon Valley Bank next… a bank tied deeply to the venture-capital industry. Then regulators closed New York-based Signature Bank… another bank with ties to crypto.
The fear was contagious. It ran rampant in the regional-banking sector. Investors panicked. And the sector dropped double digits in just a few days.
That kind of decline is rare. But while this crisis is likely far from over, history shows huge profits are possible from here.
Let me explain…
These three firms serviced two high-risk industries as their main customers: crypto and venture capital. And thanks to last year’s market meltdown, both industries have shrunk dramatically.
That led to a massive number of withdrawals… a classic “run on the banks.”
Regulators have already stepped in. They’ve taken control of Signature Bank and Silicon Valley Bank. And according to a joint statement from the U.S. Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (“FDIC”), depositors of both banks will be made whole and “no losses will be borne by the taxpayer.”
It’s far too early to know how things will play out from here. But we can look to the past to find opportunities. In this case, history shows incredible gains tend to follow the kind of crash we’ve seen in regional banks.
We can see this in the SPDR S&P Regional Banking Fund (KRE). This fund holds a basket of regional-bank stocks like the ones we’ve discussed. And it crashed as a result of the crisis.
In total, KRE dropped 23% from Thursday, March 9 through Monday, March 13. Take a look…
This was a brutal crash. In fact, it was the second-worst three-day decline since 2006, when the fund launched. (And yes, that includes the 2008 financial crisis.)
So as investors, what can we do to take advantage of the situation?
History is sending a clear message: It could be a rocky road from here. But buying today could lead to fantastic gains.
To see it, I looked at the largest three-day losses for KRE. The recent 23% drop was the second-worst three-day decline ever. But we’ve also seen several three-day declines of 15% or more. Here’s what happened after those…
Overall, regional banks have lost money (excluding dividends) since 2006. KRE has dropped 0.6% over a typical year during that time.
That doesn’t tell the full story, though… because if you buy after a crash, you can do incredibly well.
Similar setups led to 10.8% gains over three months, 11.9% gains over six months, and phenomenal gains of 56.4% over the next year. What’s more, KRE was higher 83% of the time a year later.
Obviously, this is a scary situation. And, of course, things could get worse before they get better. But history shows the biggest rewards await investors who act during these scary times.
It’s smart to wait for prices to reverse before getting in. But regional banks are a sector you should have on your radar in the coming weeks.
Good investing,
Chris Igou
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Source: Daily Wealth