Many of the largest financial institutions in the U.S. experienced significant declines on Friday following a major announcement from the Federal Reserve. Some bank stocks – including JPMorgan Chase & Co. (JPM) – tumbled toward their lowest levels of the year.
While sectors can post huge losses on any given day, a slump in the banking sector tends to be particularly worrisome. Since the American financial system is so crucial to the health of the overall economy, investors grow anxious when the leaders of the American financial system endure any sort of market hardship.
Here’s what dragged U.S. bank stocks lower on Friday – and what investors can expect from these companies later in 2019…
The News
Friday’s losses marked the banking sector’s second straight day of declines as it reacts to the Federal Reserve’s abrupt forecast change on Wednesday. The central bank announced that it would not raise its benchmark interest rate at all in 2019, which sharply contrasts the two rate hikes previously forecasted near the end of 2018. While the Fed originally predicted a 2.3% growth rate in 2019, it has now cut that forecast to 2.1%.
The central bank’s rationale behind the move appears to be slowing economic growth, particularly in Europe and China due to Brexit concerns and the ongoing trade war, respectively. However, Fed Chair Jerome Powell hinted at fears of slowing U.S. growth, noting at a news conference: “While the U.S. economy showed little evidence of a slowdown through the end of 2018, the limited data we have so far this year have been somewhat more mixed.”
How Investors Reacted
Market participants engaged in a sector-wide selloff of bank stocks, with the hardest hit companies including JPMorgan, Citigroup Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), and Goldman Sachs Group Inc. (GS).
Shares of JPMorgan – the largest U.S. bank by assets – fell just over 3% on Friday from $102.87 the previous close to $99.76. That marked the lowest settlement since Jan. 3 when shares dropped 2.2% from $99.31 to $97.11. JPM stock is now only up 2.2% in 2019 from $97.62 on Dec. 31 to $99.76.
Citigroup experienced the biggest losses of the group, as the stock declined 4.6% on the day from $63.91 to $60.98, the lowest settlement since Jan. 14. With Friday’s close, C stock’s year-to-date gain sits at 17.1%.
BAC on Friday dropped 4.15% to $27.01 per share, the worst close since Jan. 15 when shares settled at $26.55. However, the stock is among the best 2019 performers in the sector, climbing 9.6% since Dec. 31.
Shares of Wells Fargo went from $49.86 on Thursday to $48.31, marking a daily decline of 3.1%. WFC has been more volatile than most banks, averaging three-year monthly beta of 1.20. The stock has gained 4.8% this year from the Dec. 31 close of $46.08 to $48.31.
Finally, Goldman Sachs fell only 2.9% during Friday’s session, dropping from $194.58 to $188.96. That was the lowest close since Jan. 15 when shares settled at $179.91. GS stock now holds a year-to-date gain of 13.1%.
The Bigger Picture
On both an earnings and investing basis, the financial sector tends to rise and fall on the Federal Reserve’s decisions to raise or not raise interest rates. Powell’s announcement on Wednesday indicating no rate hikes in 2019 means that banks could earn less than they thought last year when the Fed expected two rate hikes.
Banks are unique in that they’re among the only entities that don’t benefit from lower rates. When consumers pay less interest, they have more disposable income and are therefore encouraged to spend more, which subsequently boosts the economy in many regards. Businesses additionally benefit from lower rates since they can take out loans for cheaper, allowing them to expand their operations and grow at a confident pace.
But this harms banks because they make less money on the loans they give out. If the federal funds rate – which is the benchmark U.S. interest rate that the Federal Reserve manages – is higher, banks can charge every customer more interest on every loan they take out. For instance, banks can earn $4,000 on every $200,000 loan taken out when interest rates are at 2%.
The Fed announcing it will keep rates stagnant means bank revenue may stagnate in 2019, since financial institutions won’t be able to collect higher interest payments. Investors obviously recognized this, which enticed them to sell their banking shares in anticipation of far lower banking profits this year.
Looking Ahead
While the big Wall Street banks have several other income sources like trading revenue and asset management, their bread-and-butter has always been interest payments. With the Fed now saying the federal funds rate may be lower for longer, investors are right to be scared of their long-term prospects in 2019.
That being said, investors should wait and see how the recent announcement plays out in the big banks’ upcoming Q1 earnings reports. If they see that their other income sources can’t pick up the slack left by lower rates, they may want to hold off on pouring more money into the banking sector.