Morgan Stanley's top stock strategist, Mike Wilson, has warned that the US is experiencing a credit crunch, with data showing that banks are tightening their lending purse. The credit crunch appears to have stemmed from the fallout of Silicon Valley Bank (SVB), and it is causing banks to scramble to offset a breakneck pace of deposit flight.
Wilson notes that $1 trillion in deposits has been withdrawn from US banks since the Federal Reserve began raising rates a year ago. More specifically, data shows the biggest two-week decline in lending by banks on record, as they simultaneously sell mortgages and treasuries at a record pace to offset deposit flight.
"To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for. Falling inflation last week, especially for goods, is a sign of waning demand, and inflation is the one thing holding up revenue growth for many businesses," Wilson said.
Wilson's concerns are supported by recent data showing that credit availability for small businesses has seen its largest drop in 20 years, according to a recent survey from the National Federation of Independent Business, alongside the highest interest rates seen in 15 years. This tightening of financial conditions raises the risk that the US economy could fall into a recession this year, as both companies and households experience difficulty obtaining credit.
Wilson believes that the spate of bank failures and the ensuing credit crunch means that stocks are in for a difficult year going ahead. He had previously forecast as much as a 20 percent drop in the S&P 500 in 2023 as corporate earnings drop, with the worst earnings recession since the 2008 global financial crisis potentially on tap this year.
Despite major indices holding steady since the SVB episode, Wilson warns that this should not be taken as a sign that everything is fine. Instead, it is an indicator that stocks are at risk of a sudden drop, similar to what has been seen in small caps and bank stocks since March.
The tightening of financial conditions is causing concern for many investors, particularly those with investments in small businesses or banks. The credit crunch has also raised questions about the Federal Reserve's monetary policy, with some experts suggesting that the central bank may need to take more aggressive action to counter the effects of the credit crunch.