Tuesday marked another positive day for the Dow Jones Industrials (DJINDICES:^DJI) which rose almost 87 points to climb back within 100 points of an all-time record high. Although largely positive earnings reports got most of the credit from market commentators for today's gains, strength in the Dow's financial sector contributed substantially to the averages positive close today. Just as Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) got punished for the bad news that Bank of America (NYSE:BAC) had yesterday, those banks regained some of their lost ground today as investors weighed took a calmer, longer-term approach to the situation and looked more broadly at the prospects for the entire banking sector.


Dealing with B of A
Bank of America got most of the attention yesterday, with its stock falling the most after it announced it would have to suspend its planned share buyback and dividend increase. But what made much less sense were the declines that Goldman Sachs and JPMorgan Chase suffered, as there was no evidence that they had done anything wrong in accounting for any similar exposure they might have had on their books. Today, B of A bounced back by 2%, regaining about a third of its Monday decline.

But the B of A episode is far from the most important issue affecting Goldman Sachs, JPMorgan Chase, Bank of America, and other major U.S. banks. Positive data on home prices helped pull more homeowners further out of their underwater-mortgage situations, potentially helping the financial stocks both within and outside the Dow Jones Industrials to the extent that they still have any bad-loan exposure from the housing bust and ensuing financial crisis. Yet commentators also noted some signs of weakness in the housing sector, a key component of what the Federal Reserve looks at in assessing the strength of the overall economy and its policy responses to current conditions.


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Along those lines, the Fed's Open Market Committee meets today and tomorrow, and most investors expect the Fed to continue tapering down its bond-buying activity under quantitative easing. So far, the Fed's taper hasn't produced anything close to the chaos in the bond market that many had expected, with rates actually having fallen so far in 2014. Eventually, most analysts agree that interest rates will have to rise, and that could continue to weigh on JPMorgan Chase's and Bank of America's mortgage origination business as well as Goldman Sachs' bond-trading division. But the fact that the Fed has thus far orchestrated an orderly exit from quantitative easing, rather than the turbulent environment for interest rates in the middle of last year, has reassured markets generally and investors in financials specifically.

JPMorgan Chase, Bank of America, and Goldman Sachs will still have to keep working hard to grow and regain their former positions atop the U.S. economy. Yet as long as they keep enjoying favorable economic conditions that bolster modest but consistent economic growth, the Dow's current and former bank stocks should prosper in the long run.

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Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. The Motley Fool recommends Bank of America and Goldman Sachs and owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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