While there has been an unpleasant realisation that in the near term growth is not going to be quite as strong as it was, the consensus expectation is that bottlenecks will soon ease, demand will continue to be strong and growth will be above trend next year, even as the Fed eases off asset purchases. Under this scenario (which is what the stock market seems to be pricing in) longer-term rates should keep right on rising.

All that sounds pretty good for banks. But, while bank stocks had a pretty good day on Thursday, they have not done so well in recent months. Here is the performance of the KBW bank index, compared with the S&P 500:

Banks lend money and then hope to get paid back. The latter part of their business has been doing great. Loan defaults have been amazingly low. Here is a chart — to pick one type of loan at random — of auto loan defaults, from Deutsche Bank. Similar patterns are visible across various loan types.

The problem has been the first part of the business. Demand for loans has been awful. Switching to the commercial side, here is the outstanding volume of commercial and industrial loans at big banks:

That spike last year is companies drawing down their credit lines in anticipation of a Covid crash crunch that never happened. 

Today, business loan volumes are stuck back at 2018 levels. Part of this is market share loss to the bond market, but demand for capital just has not been great. 

So, if things are so good, why aren’t banks doing better? One possibility is that the stock market is just sort of dumb about banks, and trades them mechanically in response to the 10-year bond yield. Here is that yield, charted against the relative performance of the banks versus the broad index:

Banks are actually much more sensitive to short-term rates than long-term ones, so this correlation doesn’t make tons of sense, except to the degree that 10-year yields reflect future growth and banks are very economically sensitive.

But there is another possible interpretation of banks’ weak stock performance, which is that the economic and policy outlook isn’t that good, whatever stocks in general seem to be saying, and banks are going to be stuck in a low-rate, low-credit-demand world, and bank investors know it.