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Bank stocks plummet: It’s the economy, stupid.

August 9th, 2011 |

stock-plummet.jpgThe stock market has been filled with irony (not to mention misery) lately.

Investors flocked to the safety of U.S. Treasuries, despite the fact that Standard & Poor’s had just downgraded the U.S. debt rating late Friday.

Bank of America led the market’s precipitous decline on Monday, falling 20 percent to $6.41 per share, on news that AIG was suing the bank for the insurance company’s financial problems.

The Dow Jones Industrial Average fell 5.6 percent Monday to 10,810, following last week’s biggest weekly drop since 2008, then surged in early trading Tuesday as bargain hunters came calling.

The Keefe Bruyette & Woods Bank Stock Index, which consists mostly of large-cap banks, fell 10.7 percent Monday and then recovered somewhat by gaining 7 percent the next day.

The stock market pundits had been talking about what little impact the S&P downgrade would have, and investors reacted by abandoning stocks instead.

Analysts at KBW say what’s really happening is investors are worried about the economy, not the downgrade, and that doesn’t bode well for financial stocks.

But ironically, there was no new news about the economy to warrant such a free fall, only news about the debt rating.

Perhaps investors are beginning to believe the recovery will be slow to nonexistent for a long time and it took until late summer for that to sink in. There’s also the fact that many of them have the equivalent of “panic button” orders to sell when stocks fall below a certain point.

Bank stocks often take the biggest hit when the economy falters. High unemployment and low consumer confidence means fewer loans for everything from homes to shopping centers. Plus, many of the largest banks in the country have a lot of earnings exposure to the world’s stock markets, in the form of investment banking and trading revenues.

And as banks cut back on expenses because revenue is tight, so will they cut back on employment, as evidenced by a Bloomberg News breakdown of where all the job losses will be in banking.

Scott Brown, chief economist at Raymond James & Associates, said in his weekly commentary that: “Many commercial banks, for example, have large holdings of Fannie Mae and Freddie Mac debt. These banks may, in turn, move to boost capital and reduce lending to consumers and businesses,” as a result of the debt downgrade.

Predictably, investors are being told not to panic, just at a time when it seems like everyone is panicking.

Even analysts at S&P, whose downgrade was surrounded by so much tumult, said they thought stocks have been “oversold,” and that the U.S. will likely avoid another recession, according to Forbes.

Jerry Webman, chief economist at Oppenheimer Funds in New York, told ABC News: “The most important thing for people to do right now is to take a deep breath, whether you're reacting to the latest, pretty good job numbers or you're still in shell shock from everything else we've learned in the last week.”

Sigh.

nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.

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