Why JPMorgan Earnings Didn't Crush the Dow's Financials

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

Throughout the financial crisis, JPMorgan Chase (NYSE: JPM  ) managed to avoid ever posting a quarterly loss. Yet in its earnings announcement this morning, the banking giant posted its first losing quarter in almost a decade. Even though the stock didn't take a big hit from the announcement, JPMorgan's losses have some wondering to what extent the stock market overall might be vulnerable to earnings-related declines.

Admittedly, the recent changes to the Dow Jones Industrials (DJINDICES: ^DJI  ) put a much greater emphasis on financial stocks. In that light, JPMorgan's news might seem ominous for the average as a whole. But the new Dow's financial focus is more broadly diversified than it used to be, going beyond traditional banking to incorporate significantly different business models.

Not just banks
As an example of just how different those business models can be, look at Visa (NYSE: V  ) , which was up strongly today despite JPMorgan's news. Although JPMorgan's Chase credit card unit has a strong relationship with Visa, Visa's profits depend much more on transaction volume than on the credit-quality concerns that plagued many card-issuing banks during the financial crisis. In fact, parts of JPMorgan's earnings release actually point to strength in cards, as it reported an 11% jump in card sales volume and 14% gains in merchant processing volume. Those figures suggest that the card business is still strong.

American Express (NYSE: AXP  ) was also up today, perhaps in sympathy with JPMorgan's credit card division. Unlike Visa, AmEx retains credit risk, and so it had some of the same vulnerabilities that Chase suffered from five years ago. Yet AmEx has also been working at diversifying its business exposure, with initiatives like its prepaid debit card showing a drive to add customers beyond the company's traditional high-end luxury focus. So far, those initiatives appear to be working well.

Even Goldman Sachs (NYSE: GS  ) managed to post gains today, despite sharing more of JPMorgan's business lines than Visa and AmEx do. Poor results in JPMorgan's fixed-income business figured in its overall weakness, as rising interest rates had an impact on its trading results. Goldman has a heavy emphasis on the bond market in its own trading, and so it's likely to face many of the same headwinds that JPMorgan did.

Yet Goldman wasn't a big player on the mortgage-origination side of the business during the financial crisis, and that has proven useful in helping to limit its liability. Although Goldman has seen its share of investigations, it has largely avoided hitting investors with a litany of massive outlays to settle its legal and regulatory problems.

Where JPMorgan's losing
By contrast, much of JPMorgan's losses this quarter came from a $7.2 billion charge to cover legal costs. The bank has now set aside $23 billion in total for its legal and regulatory liabilities, and the bloodletting could continue well into the future.

For JPMorgan, today wasn't the best of days. But Dow investors shouldn't conclude that all of the average's financials will suffer. With its recent moves, the Dow's financials are diversified enough to avoid letting one bad result bring the entire sector down.

Can you still profit from banks?
JPMorgan might be a loser today, but it's still posted big gains in recent years. If you haven't bought banking stocks, though, where can you still find smart bargains? Find out where you need to look by reading The Motley Fool's new report, "Finding the Next Bank Stock Home Run." It will show you how and where to find these deals. It's completely free -- click here to get started.


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