Bank stress tests are proving their worth today, as JPMorgan and Wells Fargo stocks fall less than the broader stock market.
Troubling news out of Japan tanked stock markets this morning, and financial companies are suffering. Through 1:11 p.m. ET, shares of JPMorgan Chase (JPM -2.08%) are down 2%, Wells Fargo (WFC -2.16%) dropped 2.4%, and insurance giant Chubb Limited (CB -2.94%) fell 3.1%.
But hold on a second. The broader S&P 500 is down 2.6% today, less than Chubb but more than the banks. Could this be good news for America’s big banks?
What bank investors need to know about the yen carry trade
Let’s start with the basics. The yen carry trade sparked today’s sell-off. Currency traders — including those who work for big banks — have been borrowing cheap money in yen, then using these loans to buy U.S.-denominated debt (to capture higher interest rates) and U.S. tech stocks (which have benefited from the artificial intelligence (AI) revolution).
So far, so good. But now that the Bank of Japan has hiked interest rates, yen loans aren’t cheap anymore. Traders are selling U.S. assets to raise cash to pay back their yen loans, and all this selling is crashing stock markets here in the U.S.
Is it time to buy U.S. banks?
Logically, that makes some sense. If banks have been caught wrong-footed by the yen carry trade reversing, they may incur losses on their currency trades. An appreciating yen will make loans more expensive to pay back. If assets bought with yen loans fall in value, they may need to be sold at a loss to pay back the loans. Insurance companies that own a lot of assets could be particularly at risk.
At the same time, it’s encouraging to see that the stocks of JPMorgan and Wells Fargo aren’t getting hit as hard as the broader market today. This suggests investors are confident that, after passing bank stress tests, these banks have proven that they’re strong enough to survive this crisis. What’s more, both banks are priced at a cheap 11 times earnings and pay respectable dividends — 2.5% for Chase and 3% for Wells.
Today’s financial crisis may be telling us it’s time to buy Chase and Wells Fargo stocks.
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. Rich Smith 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.
