Banks Pull Down the Dow to Start the Week

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Investors had a few days over the weekend to digest the Federal Reserve's "no taper" decision and today got some more clarity over why the delay happened in the first place. Fed Bank of Atlanta President Dennis Lockhart said it will take creative leadership for the economy to regain its "mojo," Fed Bank of New York President William Dudley said the economy needs "very accommodative monetary policy," and Dallas Federal Reserve President Richard Fisher said he urged the Fed in favor of tapering off the $85 billion in monthly bond purchases.

If that sounds like a confusing mash of opinions, that's because it is -- and that's one reason stocks are down today. The Fed is slowly moving toward pulling back on easy money, but there's debate as to how healthy, or unhealthy, the economy is and therefore the rate at which the Fed can remove the crutches. The markets don't like uncertainty, which has the Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.29%, the S&P 500 (SNPINDEX: ^GSPC  ) off 0.4%, gold down 0.56%, and oil 1.03% lower. It's not often all of those components move in the same direction so there's a lot of negative sentiment clouding the market today.

Leading the Dow's declines today are JPMorgan Chase (NYSE: JPM  ) and Goldman Sachs (NYSE: GS  ) , which are respectively down 2.1% and 2.4%. One driver of the declines is disappointment in the Fed's decision not to taper. Higher interest rates from tapering would result in higher spreads between what banks can borrow for the short term and lend for the long term, increasing their profits. With interest rates down because of continued stimulus, tight margins will persist in the lending business.

The second thing hitting banks is a report that Citigroup's trading revenue will be disappointing this quarter. The Financial Times reported reporting that income could fall by more than 10% this quarter because of slower trading revenue. Investment banks such as Citigroup, JPMorgan, and Goldman Sachs rely on volume to keep their market-making businesses profitable; a slowdown at one would likely leak over to the other big banks as well. Watch third-quarter earnings releases for comments on this over the next few weeks.  

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