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Here's Why Bank Stocks Tumbled Over Rising Recession Fears
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Last week’s sell-off continued, and Wall Street experienced its sharpest decline of the year on Monday. The markets were rattled by growing economic concerns just a day after President Donald Trump did not dismiss the possibility that his policies could lead to a recession.
In a taped interview with Fox News Channel's ‘Sunday Morning Futures’, the President, when asked whether he was expecting a recession in 2025, said, “I hate to predict things like that. There is a period of transition because what we’re doing is very big. We're bringing wealth back to America. That's a big thing.”
As such, the Dow Jones Industrial Average fell 2.1%, while the S&P 500 dipped 2.7% and the Nasdaq Composite declined 4%. Bank stocks (whose financial well-being depends on the nation’s economic health) performed worse than major benchmarks. The KBW Nasdaq Bank Index and the S&P Regional Banks Select Industry Index slid 4.3% and 4%, respectively.
Across the banking industry, the largest regional banks, including Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) and JPMorgan (JPM - Free Report) , tanked more than 4%. Well-known investment banks Morgan Stanley (MS - Free Report) and Goldman Sachs (GS - Free Report) were not far behind and declined 6.4% and 5%, respectively.
The U.S. economy continues to be in good shape, as indicated by the jobs report, which was released on Friday. However, economists are turning pessimistic due to President Trump’s unpredictable tariff policies, which have made it difficult for businesses to plan investments and hiring. Moreover, cuts to the federal workforce and government spending freezes have dampened consumer confidence. On March 3, the Atlanta Fed's GDPNow model estimated that the U.S. economy will contract by an annualized rate of 2.4% in the current quarter.
Bank Stocks & Mounting Recession Risks
Recessions are bad for banks. The most important reason is the drop in demand for loans. Additionally, it could cause a spike in delinquency rates, mainly in the consumer loan portfolio.
In addition, on the investment banking side, while trading revenues usually perform well in uncertain market conditions, a challenging economic environment often results in reduced merger and acquisition activity, fewer initial public offerings and a decreased willingness from companies to take on new debt.
Nonetheless, there are some positive outcomes from recession risks. The Federal Reserve may have to lower rates to support the economy. The market participants are now predicting three interest rate cuts this year, up from one estimated a few weeks ago. As the rates come down, banks’ funding costs (that have been on a record high since last year) will decline. Further, it is expected to boost some lending activity, primarily mortgage refinancing.
But, during the recession, the bad always outweighs the good for the banking industry.
The banking industry is one of the most cyclical ones, making its stocks particularly sensitive to recession fears. With the key inflation data set to be released on Wednesday, one must keep an eye on it and other economic data before making any investment decision.
Image: Bigstock
Here's Why Bank Stocks Tumbled Over Rising Recession Fears
Last week’s sell-off continued, and Wall Street experienced its sharpest decline of the year on Monday. The markets were rattled by growing economic concerns just a day after President Donald Trump did not dismiss the possibility that his policies could lead to a recession.
In a taped interview with Fox News Channel's ‘Sunday Morning Futures’, the President, when asked whether he was expecting a recession in 2025, said, “I hate to predict things like that. There is a period of transition because what we’re doing is very big. We're bringing wealth back to America. That's a big thing.”
As such, the Dow Jones Industrial Average fell 2.1%, while the S&P 500 dipped 2.7% and the Nasdaq Composite declined 4%. Bank stocks (whose financial well-being depends on the nation’s economic health) performed worse than major benchmarks. The KBW Nasdaq Bank Index and the S&P Regional Banks Select Industry Index slid 4.3% and 4%, respectively.
Across the banking industry, the largest regional banks, including Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) and JPMorgan (JPM - Free Report) , tanked more than 4%. Well-known investment banks Morgan Stanley (MS - Free Report) and Goldman Sachs (GS - Free Report) were not far behind and declined 6.4% and 5%, respectively.
The U.S. economy continues to be in good shape, as indicated by the jobs report, which was released on Friday. However, economists are turning pessimistic due to President Trump’s unpredictable tariff policies, which have made it difficult for businesses to plan investments and hiring. Moreover, cuts to the federal workforce and government spending freezes have dampened consumer confidence. On March 3, the Atlanta Fed's GDPNow model estimated that the U.S. economy will contract by an annualized rate of 2.4% in the current quarter.
Bank Stocks & Mounting Recession Risks
Recessions are bad for banks. The most important reason is the drop in demand for loans. Additionally, it could cause a spike in delinquency rates, mainly in the consumer loan portfolio.
In addition, on the investment banking side, while trading revenues usually perform well in uncertain market conditions, a challenging economic environment often results in reduced merger and acquisition activity, fewer initial public offerings and a decreased willingness from companies to take on new debt.
Nonetheless, there are some positive outcomes from recession risks. The Federal Reserve may have to lower rates to support the economy. The market participants are now predicting three interest rate cuts this year, up from one estimated a few weeks ago. As the rates come down, banks’ funding costs (that have been on a record high since last year) will decline. Further, it is expected to boost some lending activity, primarily mortgage refinancing.
But, during the recession, the bad always outweighs the good for the banking industry.
The banking industry is one of the most cyclical ones, making its stocks particularly sensitive to recession fears. With the key inflation data set to be released on Wednesday, one must keep an eye on it and other economic data before making any investment decision.
At present, JPM, MS and GS sport a Zacks Rank #1 (Strong Buy), and WFC and C have a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.