July’s jobs report was surprisingly weak, putting pressure on the Federal Reserve to move more aggressively.
Bank stocks are ending the trading week on low note, down across the board much more than the broad market’s setback of around 2.2%. As of 3:07 p.m. ET shares of JPMorgan Chase (JPM -4.94%) and Wells Fargo (WFC -6.94%) are lower to the tune of 5.1% and 6.9%, respectively, leading the charge lower in addition to setting an industrywide bearish tone.
The prompt behind the selling? Mostly more reason to expect an interest rate cut sooner rather than later, and perhaps a bigger one than previously expected.
Deeper interest rate cuts now likely
A quarter-point rate cut in September was already more likely than not. In light of today’s jobs report for July, however, the market’s now betting the Federal Reserve will cut the federal funds rate by a half point. This more aggressive stimulative stance may be merited given that the U.S. unemployment rate unexpectedly jumped from 4.1% to a multiyear high of 4.3% last month, while payroll growth fell to 114,000 new jobs versus expectations of 175,000.
The report presents bank investors with a conundrum. On one hand lower interest rates make borrowing more affordable, thus driving the economic growth that in turn drives stocks higher. On the other hand, lower interest rates make lending money a less profitable venture. That’s the chief reason Wells Fargo and JPMorgan shares are in the red today. Also bear in mind, of course, that a tepid economy reflected by poor employment numbers crimps demand for a variety of banking services.
That being said, don’t look past the fact several banking names including JPMorgan Chase and Wells Fargo were made vulnerable before Friday of this week. For instance, Wells Fargo is now being sued for low returns on certain customers’ cash balances, and is also being probed regarding how it handles money-laundering matters. Moreover, although JPMorgan is in no new legal or regulatory trouble, Reuters reported on Tuesday that the bank anticipates more aggressive investor activism in the foreseeable future.
Given this backdrop, the potential “bad” news of lower interest rates made both tickers relatively easy targets today.
Right stocks, wrong time
Neither bank is doomed, for the record. Both are apt to remain industry leaders. Their stocks should perform accordingly, reflective of the fact that there are pros and cons of higher and lower interest rates. It’s also worth adding that today’s — and this week’s, for that matter — setbacks are likely more the result of marketwide weakness than actual worries about either company’s near-term or long-term prospects.
Nevertheless, bargain-minded investors may want to wait for all of this indiscriminate worry to run its full course before diving into a new position in either name.
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
