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I’ve spent a good portion of this morning fielding questions about the banking sector.Some related to what we might have learned about earnings season so far; some related to some unpleasant credit news from specific regional banks.Here are some thoughts.

We touched on one aspect of bank earnings yesterday, when we noted that Morgan Stanley (MS) was being rewarded partially for their solid trading results.This is a particular peeve of mine, not relating to MS, but to years of helping post positive trading results for my firm only to have them discounted by analysts who would repeatedly ask whether and when we planned to exit the proprietary trading business. (Spoiler alert, we did.)To be fair, there were other aspects of their report that would have normally justified a positive market response, but that touched a nerve.It indicated that investors will gravitate toward any piece of positive news in this environment, even if it was not one that typically mattered in the past.

Although we once again reiterated our caution about reading too much into bank earnings as a bellwether for trends in the broader scope of earnings season, the government shutdown brought more focus upon them.With a lack of government data, investors and analysts (and central bankers) need to rely more than usual on alternative sources of information.Some of those would be the banks’ concrete data about borrowing and lending along with anecdotal evidence offered by bank executives during earnings calls. In general, it pointed to a solid, if K-shaped, economy with many individuals and businesses doing quite well and feeling sanguine, even if large segments of lower-income families are feeling stresses. 

In light of this, I was asked specifically if the bank earnings reports augured higher expectations for the coming earnings season. My belief is that the earnings reports from the big banks reaffirmed the positive sentiment heading into this season but did not necessarily boost them further. Considering that investors are clearly in a sanguine mood despite Friday’s air pocket, I don’t think we want to see expectations boosted too much further.High expectations can be met; overenthusiastic expectations face a very high hurdle.

There were some blemishes that bear watching.Zions Bancorp (ZION) and Western Alliance (WAL) both got hit on concerns about credit quality.As of now, those seem isolated to those two relatively sizeable regional banks.Although they are similar in size and scope to Silicon Valley Bank, which caused a bit of a crisis about two-and-a-half years ago when it failed, there is nothing (at least so far) to indicate that these are anything systemic.Quite frankly, there always seem to be banks with credit issues somewhere – it’s kind of the nature of the business. 

Yet it became clear that someone might be paying attention to these situations more broadly.Around midday we saw the usual, set-your-watch-by-it rally fade on a lack of follow-through.That occurred yesterday without much damage.Today’s drop accelerated more quickly, with some attributing a rally in short-term Treasuries stemming from concerns related to the -8% drops in ZION and WAL. Again, I know of nothing concrete that would encourage those concerns, though the reaction of the broader market may be telling us that an appreciation for risk, as opposed to an outsized desire for reward, might be creeping back into investor psyches.

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