Americans love to hate the banking sector. For the average citizen, the term “banker” tends to conjure the image of Lionel Barrymore’s hammy performance as Mr. Potter in “It’s a Wonderful Life.” This negative stereotype was reinforced by the financial crisis of 2008 and ensuing Great Recession.

These pre-conceived attitudes have resurfaced over the past two weeks, due to the failures of U.S.-based regional banks and the shakiness of giant European banks.

The Federal Deposit Insurance Corp. (FDIC) on March 13 stepped in to cover all deposits, even those over the limit of $250,000, for Silicon Valley Bank (SVB) and Signature Bank. The money will come from the FDIC, a fund that all banks pay into, so technically the rescue of these two failed banks isn’t a taxpayer “bailout.”

But that’s a matter of semantics. Fact is, the feds interceded to rescue wealthy, reckless tech entrepreneurs and venture capitalists, thereby creating “moral hazard,” i.e. a lack of incentive to guard against risk because of protection against its consequences. Some lawmakers in Congress have decried the rescues as socialism for bankers.

Politicians and voters profess to hate bailouts, but we keep getting them. It didn’t help SVB’s public relations when its executives were avidly paying out congratulatory bonuses to themselves, hours before the FDIC rushed in to take over their failing institution. That said, the consequences for not bailing out the troubled regional banks would have been catastrophic.

As I explain below, these contradictions present opportunities right now for contrarian investors.

Large-cap banking stocks recently have experienced wide swings in valuations, as they get unfairly tarnished by the mishaps (and misdeeds) of their smaller peers. These dramatic moves are more likely based on investor psychology than new material information coming to light.

Always be on guard for behavioral biases in the stock market. Investors need to get beyond recent turmoil in the banking sector and imagine how inherently strong bank stocks are capable of performing over the long term.

Read This Story: How to Profit From The Collapse of Silicon Valley Bank

This year’s banking crisis does not resemble the financial meltdown of 2008…not even close. Back in 2008, we were grappling with a vast amount of toxic assets, such as sub-prime mortgage-backed securities and collateralized debt obligations. That’s not the case this time around. What’s more, overall loan-to-deposit ratios are currently healthier (see chart).

The upshot: The battered valuations of certain financial stocks make them compelling investments. That’s especially true of the bigger players, which are positioned to buy smaller rivals. As the financial sector consolidates, new investment opportunities will emerge.

The paradox of crisis…

The banking crisis has triggered a change in market expectations of Federal Reserve rate hikes. Wall Street currently forecasts no additional rate hikes, and expects the Fed to begin slashing rates as early as its July meeting.

Indeed, there are now three or four rate cuts priced in for 2023, which would bring the fed funds rate to about 4.0%, well below the 5.1% indicated by the Fed in its March meeting.

The tightening cycle is nearing its end, and accordingly, bullish sentiment is increasing. U.S. stocks generally rose Monday, as did European equities. At home and abroad, banking stocks led the way. As federal regulators decisively step in, beaten-down regional bank stocks have rebounded.

That said, the main U.S. stock market indices took a breather Tuesday and closed lower as follows:

• DJIA: -0.12%
• S&P 500: -0.16%
• NASDAQ: -0.45%
• Russell 2000: -0.06%

The S&P 500 is now below its 200-day moving average, which is an inauspicious technical sign. Volatility won’t end anytime soon.

Paradoxically, the banking crisis has been good for the stock market, because it will likely motivate the Fed to get less hawkish due to liquidity concerns. The crisis also is deflationary, because it will tighten lending standards and make bankers more cautious.

By the same token, the crisis has not been bad enough to cause lasting damage to the global economy. Panic has been averted.

But maybe you’re still spooked by current market volatility. There’s a way to stay cautious, while staying invested. I suggest you consider our premium trading service, Rapier’s Income Accelerator, helmed by income expert Robert Rapier.

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John Persinos is the editorial director of Investing Daily.

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