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Bank equities were substantially pulled down by jittery markets, as traders worried about the economic recovery’s long-term viability. The
S&P 500 Index
On Thursday morning trade, the Dow Jones Industrial Average dipped 1.2 percent on fears—some confirmed—that the Delta strain of the coronavirus might impede the economic recovery. As investors fled the stock market, they flocked to Treasuries, bringing the 10-year Treasury note’s yield below 1.25 percent. (As rates fall, bond prices rise.) However, the drop in bond yields is bad news for banks, as lower rates cut into their profits.
The S&P 500 began trading on Thursday morning.
S&P Bank SPDR
The exchange-traded fund (KBE) was down 1.4 percent.
Bank of America is a financial institution based in the United
The stock (BAC) fell 1.7 percent, while
The Goldman Sachs Group is a global investment bank.
(GS) as well as
JPMorgan Chase & Co., Inc.
(JPM) and (JPM) were down 2.3 and 1.3 percent, respectively. Bank stocks had been on a tear this year, up more than 30% as of early June, but the rally has slowed as bond yields have fallen in recent weeks. The SPDR S&P Bank ETF is now only up 17% year to date.
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Earlier in the year, banks were buoyed by a continued surge in trading and deal-making activity, but investors were looking for other growth levers for the sector. They got what they sought in some ways: Banks released reserves set aside for potential loan losses last year in the first quarter, and the Federal Reserve eased restrictions on bank buybacks and dividends last month. However, investors will want to see a return to banks’ bread-and-butter business, which is lending, if bank stocks are to continue to rise. However, loan growth has remained flat or even negative so far, owing to the fact that some businesses are flush with cash and others are wary of borrowing during the economic recovery. When you factor in current labor shortages, supply-chain concerns, and new constraints in light of the Delta variation, the picture for economic activity returning to normal—and firms borrowing again—becomes much more bleak. Even if businesses were to borrow again, banks would earn less on those loans because interest rates are falling. The banking sector will provide an update to investors next week when the largest banks report their second-quarter results. Along with analyzing the results, Wall Street will pay close attention to the economic forecasts given by bank executives. Carleton English can be reached at carleton.english@dowjones.com./n
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