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"The Other Canaries In The Coal Mine Just Haven't Shown Up Yet"
Vildana Hajric

Investors See Clues of Bank-Fueled Slowdown

Everyone’s on the lookout for how last month’s bank turmoil may be rippling through the economy. Roughly a week into earnings season, investors are starting to get some clues.

Take Fastenal, a supplier of construction materials like nuts and bolts that’s seen as an industrial bellwether. Or the lender Ally Financial Inc.

Fastenal reported that sales growth weakened in March, raising concerns that the collapse of three banks could trigger a broader slowdown in the economy as lenders tighten standards. That risk was underscored by results from Ally, which extended fewer auto loans and set aside more to cover potential defaults as some consumers struggle to make payments.

“A massive, systemic financial confidence shock appears to have been averted, but tighter credit is manifesting in the real economy,” wrote Bank of America Corp.’s Savita Subramanian and Ohsung Kwon in a note subtitled “GFC redux? No. Credit hitting real economy? Yes.” 

The strategists cited Fastenal’s softer March sales to manufacturers, as well as slowing purchases that month across cohorts.

“Credit conditions have tightened and could tighten more,” they wrote, adding that such a move has tended to lead S&P sales growth by about two quarters.

They said that would suggest a potential deceleration of sales growth from here, though they noted that historical patterns may not hold this time around.

At Wells Fargo, Chris Harvey and his team also noticed Fastenal’s news. The head of equity strategy pointed to comments from the company that “customers were more tightly controlling operating and capital spending.”

Of course, the earnings season is just getting underway, with fewer than a fifth of S&P 500 Index companies expected to report by Friday, according to data compiled by Bloomberg Intelligence’s Michael Casper.

In addition, other indicators already pointed to the slowdown in manufacturing activity, with an Institute for Supply Management gauge in March dropping to its lowest level since May 2020 as measures of new orders and employment retreated.

But the earnings reports add to the mounting evidence that tighter credit conditions are beginning to register in the economy.
For that reason Art Hogan, chief market strategist at B. Riley Wealth Management, sees Ally as an early-warning sign.

The bank said Wednesday that its quarterly earnings dropped more than expected to less than half what they were a year earlier.

Ally said it also made fewer auto loans and set aside additional provisions for rising defaults as some consumers fall behind on car payments at a pace not seen in more than a decade. Chief Executive Officer Jeffrey Brown said the company may originate fewer loans as it focuses on risk-adjusted returns.

“This is the first place you’re going to start to see credit tightening take a pinch,” Hogan said.  “And the other canaries in the coal mine just haven’t shown up yet.”






I graduated from Colgate University in 2011 and am currently a graduate student at Columbia University's School of Journalism. I am a former NBC Page and CNBC news associate. My work has appeared in the Santa Monica Observer, NYCity Lens, TheInk, and I freelance for Stash Invest.

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