Following the yield curve inversion, the major U.S. indexes — the S&P 500, Nasdaq and the Dow Jones — decreased more than 1% on Friday. U.S. bank stocks, big and small, also plummeted.
The SPDR S&P Regional Banking ETF KRE lost 4.3% and SPDR S&P Bank ETF KBE fell 4.2%. Among the big banks, Bank of America BAC declined 4.2% while JPMorgan, Citigroup C and Wells Fargo WFC fell 3%, 4.6% and 3.1%, respectively. Further, regional banking stocks including SunTrust, Regional Financial RF, Capital One and Citizens Financial Group CFG declined around 4.6%, 6.2%, 3.5% and 4.5%, respectively.
The ongoing trade war tensions, economic slowdown in Europe and China and declining stimulus from lower tax rates affected economic data from the United States, increasing investors’ concerns for the economy over the long term. Moreover, for the first time since 2007, the 3-month/10-year yield curve inverted.
The yield on the 10-year Treasury note dipped below the yield on the 3-year note. While the yield on the 10-year note declined to 2.429%, yield on the three-month note was 2.455%.
An inversion of yield curve means short-term interest rates are higher than the long-term rates. This is perceived as an early indication of an impending recession.
For banks, which benefit from steepening of yield curve, this is bad news. Banks earn interest income by charging borrowers higher long-term interest rates while doling out smaller interest rates to depositors. This results in improvement in net interest margin (NIM).
In an abrupt change in course of action last week, the Federal Reserve turned dovish and said that there will be no further interest rate hikes this year. The long-term rates declined significantly mainly due to expectations of slowdown in the economy and inflation worries.
Thus, growth in banks’ net interest income is expected to be hampered over time. This could lead to a decline in NIM as well.
As the financial health of the nation has direct relation with banks’ profitability, assumptions of economic slowdown unnerved investors.
Should Banking Stocks be Part of Your Portfolio?
One may think that staying away from bank stocks is the right thing to do now. On the contrary, with the majority of the stocks declining, this seems to be the right time to add a few bank stocks as they are relatively cheaper.
Also, banks’ strong financial performance is likely to continue given their strong fundamentals and gradual easing of regulations by the Fed.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Wells Fargo & Company (WFC) : Free Stock Analysis Report
Citigroup Inc. (C) : Free Stock Analysis Report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Regions Financial Corporation (RF) : Free Stock Analysis Report
SPDR S&P Bank ETF (KBE): ETF Research Reports
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
Citizens Financial Group, Inc. (CFG) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research