Bank Stocks Take a Beating, Recession Fear

Declining bank stocks are a bell weather of recession fears, MarketWatch reported August 14.

Birmingham-based Regions Financial Corp. was one of the notable declines, down by 3.8 percent.

Other big losers were Citigroup, down 5.0 percent; Bank of America Corp., down 4.6 percent and JPMorgan Chase, down 3.8 percent.

“Bank stocks traded broadly, and in many cases sharply lower, as the spread between yields on 2-year and 10-year Treasurys briefly turned negative for the first time since the financial crisis, fueling fears that a credit crunch and recession were looming,” reported MarketWatch.

“An inverted yield curve refers to when yields on shorter-term Treasury notes cross below longer-term Treasury yields. One of the most closely watched yield curve measures is the 2s-10s spread, as inversions have very often preceded recessions, as it indicates that monetary policy and financial conditions are too tight to support economic growth.ā€

- Sponsor -

For banks, an inverted curve can hurt earnings and act as a drag on lending, as the usual practice of taking on shorter-term liabilities to fund longer-term assets, like loans, can start costing banks money.

John Lynch, chief investment strategist for LPL Financial, said the yield curve inversion ‘sends an important signal’ to the Federal Reserve. ā€œU.S. monetary policy is clearly still too tight, even after last month’s 25 basis point (0.25%) rate cut, given trade uncertainty and signs of slowing global growth,ā€ Lynch wrote in a note to clients.

While Lynch said that he’s not convinced a recession is imminent, given that recent data has showed that the U.S. economy is on ā€œsolidā€ footing, he acknowledged that ā€œrecessions can be self-fulfilling prophecies of market sentiment,ā€ and investors should take that risk seriously.

The latest Alabama business news delivered to your inbox