Dow Claws Back Early Losses Despite Global Fears; JPMorgan Chase, Goldman Sachs Lead Financials Lower

Concerns about global economic growth, geopolitical tension, and earnings season sent the Dow stumbling this morning. Find out where financial stocks fit in.

May 5, 2014 at 11:00AM
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The Dow Jones Industrials (DJINDICES:^DJI) and other stock indices opened the week on a down note, with a variety of factors hitting the average. Analysts pointed to the ongoing struggle in Ukraine, signs of continuing moderation in Chinese economic growth, and disappointing results from a major Dow-component pharmaceutical stock as hurting the overall market and sending the Dow down 50 points as of 10:45 a.m. EDT. However, the blue-chip index was just 10 points under breakeven by 11 a.m.

In addition to those factors, poor news from JPMorgan Chase (NYSE:JPM) sent its shares falling and brought Goldman Sachs (NYSE:GS) and other bank stocks all sharply downward on the day.

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JPMorgan Chase fell almost 2% after the Wall Street giant said that it expected recent weakness in its trading division would continue to hit the bank's overall results this quarter. Specifically, JPMorgan pointed to a possible 20% year-over-year drop in revenue from fixed-income and equities trading, as the huge moves in the bond market in past years has given way to a choppy, range-bound yield environment without as much opportunity for short-term trading. In addition, the rise in rates compared to year-ago levels will continue to weigh on JPMorgan Chase's mortgage business, with the company expecting pretax margins to be negative in the second half of 2014, with production losses of $100 million to $150 million in the second quarter.

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Flickr source.

News of weakness in fixed-income trading will almost certainly have an impact on the future results of Goldman Sachs, which dropped 1.4% in Monday morning trading. Goldman Sachs doesn't have the mortgage-market exposure that JPMorgan Chase does, but it relies even more than JPMorgan on its trading operations. If the JPMorgan news indicates general malaise among investors throughout the financial markets -- and especially in the bond market, where Goldman Sachs has a particularly strong reputation -- then Goldman is likely to face the same pressures and eventually see the same hit to revenue and earnings that JPMorgan Chase is projecting. You can see the same impact across the bank-stock realm, with share-price declines Monday roughly in proportion to the amount of business each bank gets from trading operations versus traditional banking services.

The financial industry has faced some big challenges in recent years, and as the bull market ages, financial stocks will see pressure from investors who expect that the good times for the markets can't last forever. For JPMorgan Chase, Goldman Sachs, and other companies that rely on healthy market conditions in order to keep their clients happy, fears of the end of the long bull market for stocks could end the impressive run that their own shares have given shareholders in recent years.

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Dan Caplinger owns shares of JPMorgan Chase. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of 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.

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