Last week, the Federal Reserve's sour outlook on the U.S. economy sent financial stocks down sharply. JP Morgan (NYSE:JPM) fell 7%, Bank of America (NYSE:BAC) was down 9%, Citi (NYSE:C) fell 9% and Wells Fargo fell 8% at that time.
Why did investors dump bank stocks?
Banks are the financial engine, so if the country’s restart fails to prevent a deep recession, profits will suffer. Worse, still, is the risk of customers and businesses filing for bankruptcy. Fortunately, the government sent stimulus checks to people and the Fed cut interest rates to 0%.
The risk of banks increasing provisions is moderate but not high. Banks will work with their customers to work out a repayment plan.
With the economy previously on a mandatory lock-down, the measured re-opening will bring jobs back. So long as the US resumes business without an increase in COVID-19 infections, the economic rebound will follow, too.
Bank stocks may fall to new lows in the weeks ahead. Investors should remember that even though economic activity in Q2 will be at its worst, it will improve from there. After the current quarter, credit card delinquency and loan write-offs should ease.
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