Bank Lending Slowdown and Rate Spikes Flash Warning for Stocks
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Commercial bank credit has declined 2.07% from its peak, one of only three times there has been a drop of over 2% in the last 50 years. This suggests banks are tightening lending standards.
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The other two times commercial bank credit dropped significantly, the S&P 500 went on to lose 49% and 57% during bear markets. This points to potential trouble ahead.
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With interest rates also spiking, access to cheap capital has disappeared while banks lend less. This combination often precedes economic slowdowns.
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Slower economic growth typically leads to declining corporate earnings and falling stock prices. Recessions have preceded around two-thirds of the S&P 500's major drawdowns since 1929.
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While concerning in the short-term, over long periods the stock market has always recovered. Patience is key as bear markets tend to be relatively brief compared to bull runs.