Wall Street Week Ahead: U.S. bank stocks decline as concerns about the recession grow.
Because of concerns about an impending recession and declining profit margins, shares of U.S. banks are falling in December.
When compared to the broader index (.SPX), which dropped 5.5% during the same time period, the S&P 500 banking index (.SPXBK) has fallen about 11% this month. Shares of Bank of America (BAC.N), which have dropped 16% this month, were among the worst impacted. Wells Fargo & Co. (WFC.N) and JPMorgan Chase & Co. (JPM.N) shares have both fallen by approximately 14% and over 6%, respectively.
In recent weeks, asset prices have begun to reflect investors’ growing concern that the Federal Reserve’s most aggressive monetary policy tightening in 40 years, which is intended to reduce inflation, could also stifle growth.
Treasury rates, which follow prices inversely, have recently dropped to three-month lows, suggesting that investors may be moving into bonds due to concerns about the economy. Others have said that the roughly 12% decline in energy stocks from recent highs indicates that investors may be taking a downturn in the economy into account.
Banks could be dealt a double blow: Higher rates pose a threat to narrow profit margins if the income that lenders pay out on deposits eats away at the interest gained from loans, while a recession might harm loan growth and raise credit losses.
Additional hints about the pressures banks anticipate facing come from job cuts: In order to navigate a challenging economic environment, Goldman Sachs (GS.N) is planning to lay off thousands of workers, a source familiar with the situation told Reuters on Friday. This makes Goldman Sachs (GS.N) the latest global bank to reduce its workforce in recent months.
In a downturn, bank stocks perform poorly, and more and more investors are concerned about a rough landing, according to Miller Tabak’s chief market analyst, Matt Maley.
The S&P 500 bank index is currently down more than 24% in 2022, despite the fact that bank stock prices have generally tracked the S&P 500 throughout the year. The S&P 500 has lost 19% so far this year, which would be the worst annual percentage decline since 2008.
According to Walter Todd, chief investment officer of Greenwood Capital, the recent performance of banks “is indication to me that there is greater anxiety over the economic prognosis for 2023.” Early this year, Todd’s company sold part of its bank shares due to expectations of a slowdown.
Profit margins are one possible area of concern for investors. In the third quarter, among the 20 banks tracked by RBC Capital Markets, higher rates caused net interest margins, which reflect how much a bank gets on loans and fixed income securities relative to what it pays out on deposits, to widen to their largest average differential in three years.
A portion of the recent weakness in bank stock prices, according to RBC Capital Markets analyst Gerard Cassidy, is due to expectations that net interest margins will peak next year and worries that “we are going to see increases in the provision for credit losses due to the expectation of a slowing economy in 2023.
When banks report their fourth-quarter earnings the following month, the depth of this pressure will become more apparent. Another potential roadblock for the group is that, according to Reuters this week, some of the banks that gave Elon Musk $13 billion to buy Twitter are getting ready to record losses on the loans.
When housing and consumer confidence figures are released the following week, investors will have greater insight into the state of the economy.
Of course, investors who are confident that the economy will remain steady may find the reduced shares of banks to be tempting.
According to Refinitiv Datastream, the S&P 500 banks index trades at about nine times forward earnings forecasts, less than its 12-times long-term average P/E ratio and significantly less than the S&P 500 as a whole’s approximately 17-times P/E ratio.
According to King Lip, chief strategist at Baker Avenue Wealth Management, his company recently purchased bank stocks because it believes any impact on the American economy would probably be only somewhat negative.
According to our analysis, a major recession in 2023 shouldn’t affect the economy, Lip added. “This should boost bank investor confidence.”