Financial Stocks Bruised by Sell-Off

Posted December 4, 2018 9:34 p.m. EST

Financial stocks on Tuesday had their worst day since the February sell-off.

Shares of banks in the S&P 500 were down 4.4 percent, helping pull the S&P 500 down 3.2 percent. Bank of America, Morgan Stanley, JPMorgan Chase, Wells Fargo and Citigroup were each down more than 4 percent, while Goldman Sachs was off 3.8 percent.

Behind the slide was the fall in the yields on Treasury securities as bond prices have risen. Investors have been buying Treasurys in recent days as they increasingly wager that the Federal Reserve will slow its pace of rate increases in the new year.

Banks borrow at lower short-term rates and lend at higher longer-term rates, and the bigger the difference between the two rates, the more profitable the banks are. Longer-term interest rates being set in the market have declined recently, which could signal that banks will earn less interest on their loans in the future.

The fate of financial stocks has largely been tied to the direction of interest rates in recent years.

At least for a time, bank stocks can do well in a rising-rate environment. After years of the Fed holding rates down, shares of banks took off at the end of 2015 as the central bank began to lift rates. From then through the end of 2017, financial stocks were the best-performing sector in the S&P 500, rising 44 percent and beating the broader index’s 24 percent increase.

Those gains were expected to continue into this year. The tax cut signed into law late last year raised the bottom lines of banks and the Trump administration was moving forward with cutting regulations on the industry.

But bank stocks have lagged the broader market since this spring. Investors have grown increasingly concerned about trade and economic growth, and that anxiety has increased the allure of safe, long-term bonds. The yield on the 10-year Treasury note — a bellwether for long-term rates — has spent much of that period stuck below 3 percent.