Now that things are settled, the Dow Jones Industrial Average (DJINDICES: ^DJI ) can get back to business. Soaring this morning after Mr. Market regained his composure, the index is up 150 points as of 11:30 a.m. EDT. As investors begin to reassess what the current market environment means for their investments, we may see a pause in the jubilee, but probably not today.
All eyes on Ben
Of course, the man had been saying it all along, that the future tapering of the Fed's stimulus policy was contingent upon future improvements in the economy, but that didn't stop speculation and fear from running rampant. But yesterday afternoon at an economic conference, Federal Reserve Chairman Ben Bernanke made himself very clear: no tapering would occur for the foreseeable future and would not begin earlier than expected.
So this morning investors are getting back on the horse and raising the Dow back toward its record close. But while the news has helped many of the index's economically sensitive components, the financial sector isn't getting the same boost this morning.
Banking on Bernanke
The banks are up, with components Bank of America (NYSE: BAC ) and JPMorgan (NYSE: JPM ) rising 0.75% and 0.29%, respectively. While the majority of the Dow's stocks are enjoying a close to 1% or greater jump this morning, the financial firms are falling short of the crowd. Rounding out the Big Four, Citigroup (NYSE: C ) is second best at 0.7% while stalwart Wells Fargo (NYSE: WFC ) is down 0.74%. While the markets were worried about the future performance of the banks as interest rates rose, the safety and stability of Wells Fargo was a beacon for investors -- now it may be viewed as overrated.
The banks may be lagging behind other market sectors due to current financial pressures that were created by the speculation over the Fed's tapering and had been signals that the markets would fall once it began. New mortgage activity was down last week by 3% with the rolling four-week average falling 20% due to higher interest rates. Of course, the rate hike was in response to the "signals" the Fed was giving off, so investors looked to the two biggest mortgage generators, Wells and JPMorgan, for clues. Both companies reported a drop in revenue from slowed or stalled refinancing activity but noted that higher interest rates would be welcomed in the long run.
If the speculation effects work both ways, there may be a drop in interest rates following Bernanke's clarification, but only time will tell if the banks can bring in the new business. B of A and Citigroup were hit by the speculation due to their reputations following the financial crisis. Both are viewed as weaker as they continue to recover, leaving investors with good scapegoats when the speculation went south. This explains why both are leading the big four this morning, as investors return to their original view that the two banks are progressing in their recovery stories.
Which way is up?
Trying to figure out what environment is best for the banks can be difficult. On one hand, lower interest rates generate demand (and volume) for new loans that can allow higher fee revenue. On the other, higher interest rate spreads between long-term and short-term rates can give bank revenue a boost as well. Right now the banks are caught in the middle, but for long-term investors, knowing that the banks have capable management teams that know both sides of the coin and can navigate the transition may be the biggest concern.
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