For the last couple of months, the Dow Jones Industrials (DJINDICES:^DJI) have proven vulnerable even to good economic news, as fears about the Federal Reserve pulling the plug on monetary stimulus have outweighed the positive impact of an improving economy. Yet, even though this morning's employment report initially caused some of those fears to reawaken, stock investors eventually decided that the benefits of an improving picture for workers outweighed the negative impact of the Fed's departure. Although bond rates soared and gold plunged, the Dow added 147 points, and the broader market posted similar gains of about 1%.
When you look at the stocks that gained the most today, financial stocks come to the forefront. The top two gainers were American Express (NYSE:AXP) and JPMorgan Chase (NYSE:JPM), with gains of about 2.3% each. Bank of America (NYSE:BAC) wasn't much further back with a 1.8% jump.
The big banks all stand to profit from improving economic conditions. For AmEx, the biggest driver of success is consumer spending, and with more people returning to work, prospects for further growth from the card company should improve, with fewer unemployed cardholders missing payments or dropping their cards. In particular, a surge in part-time jobs could help AmEx's Bluebird prepaid-card program, which is the company's attempt to reach out to underbanked customers who could use a low-cost, convenient prepaid option to cut their fees and get better access to their money.
Meanwhile, for banks, investors have been worried about the impact of rising rates on their mortgage-banking segments. Higher rates have already led to a reduction in refinancing transactions, and with JPMorgan and Bank of America getting a substantial amount of income from mortgage fees, today's big move up in rates might be seen as a negative. But offsetting that is the fact that, once rates move up, it doesn't matter as much to the mortgage market how much they rise; as long as short-term interest rates remain low, it's a potential profit enhancer for the banks, because they'll be able to charge more for business loans and other lending tied to higher long-term rates, while getting cheap funding from deposits paying little or no interest.
Still, one concern on the radar is the implementation of the Fed's version of Basel III regulations, which will impose new rules on the entire banking industry. In addition, the Fed is likely to go even further than Basel III did with respect to the largest banks, including JPMorgan and B of A, requiring excess capital-to-assets ratios, and minimum amounts of equity and long-term debt to facilitate wrapping up banks in the event of failure.
Banks are incredibly complicated companies, and investors have certainly gotten blindsided by financials before. But if financial stocks can avoid getting hammered too much by regulatory moves, then fundamentals in the economy appear to be moving in their favor, and that could help send stock prices up further.
Fool contributor Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends American Express and Bank of America. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.