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US bank stocks hint at recession investors fear is coming

us banks jp morgan

US banks lag behind the broader stock market and give an indication to the harsh recession investors are betting America will face as a result of the coronavirus pandemic.

“Banks, as highly leveraged institutions exposed to every kind of business and sector, offer a more comprehensive perspective on the state of the underlying US economy than the broader stock market,” wrote the Financial Times on Tuesday.

Some economists say the US faces a 7% drop gross domestic product this year along with a 20% unemployment rate.

This sort of talk raises investor’s concerns about bank default rates as jobless people fail to meet their bills. By comparison, the 2007-2008 subprime crisis saw delinquency rates for credit cards approached 7% while the rate for business loans topped at 4%.

These concerns have taken a toll on the recovery of the US financial sector, tracked by the S&P 500 Financial Sector SPDR ETF (XLF), lags behind both the S&P 500 and the Dow Jones by 23% and 10% respectively, yielding a 20% loss so far this year.

us bank stocks XLF ETF performance ytd

Banks have already booked high provisions for credit losses in anticipation to a spike in delinquency rates, but investors seem to think that the worst for the industry may be ahead, as hopes of a swift economic recovery are overshadowed by rising tensions between the US and China and a potential second wave of the virus.

JPMorgan Chase, Wall Street’s biggest bank, set aside $8.3bn to cover the potential cost of bad loans at its first-quarter earnings report in April, adding it was bracing itself for a “fairly severe recession”due to the health crisis.

Meanwhile, a low interest rate environment could contribute to shrinking net interest income for US banks, while a surge in savings rates and a slump in consumer expenditures may also lead to a drop in their top line.

Last month, bank stocks were hit by news that Berkshire Hathaway, the investment group run by billionaire Warren Buffett, sold a large portion of its bank stocks including stakes at Goldman Sachs and US Bancorp, possibly fearing a sector shake up produced by the coronavirus economic fallout.

In the meantime, the S&P 500 Financial Sector ETF is opening the session with a strong 2.5% gain, booking its third consecutive days of positive performance, while the broad S&P 500 is jumping by 0.8% this morning, breaking through the 3,100 landmark at 3,106.

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    Alejandro Arrieche

    Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.

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