Why JPMorgan and Goldman Sachs Are Weighing on the Dow Jones Today

A warning from JPMorgan Chase (NYSE: JPM  ) is pulling down Goldman Sachs (NYSE: GS  ) and other financials today after the bank said it expects trading revenue to drop 20% year over year. The Dow Jones Industrial Average (DJINDICES: ^DJI  )  started the day in the red due to worries surrounding China and Ukraine but leveled off as the day progressed. As of 1:20 p.m. EDT the Dow was flat at 16,501. The S&P 500 (SNPINDEX: ^GSPC  ) was at breakeven.

Over the weekend, tensions flared in Ukraine, while China reported weaker-than-expected economic data. China's official nonmanufacturing purchasing managers' index for April came in at 54.8, missing analyst expectations of 59.7. China is working to transition from an export-focused economy to a consumer- and services-focused economy, as its reliance on exports has led to large amounts of debt and misdirected investments in capacity. Meanwhile, HSBC's China manufacturing PMI came in at 48.1, showing a continued slowdown in the manufacturing sector.

After falling in reaction to this bad news, stock markets rebounded today in response to the Institute for Supply Management's nonmanufacturing PMI. The U.S. nonmanufacturing PMI rose to 55.2% in April, up from 53.1% in March, signaling increasing economic activity in the services sector. Readings above 50 indicate growth, with high readings meaning faster growth. April's reading was the fastest growth in eight months.

While service-sector economic activity is rising, bank stocks are weighing on the Dow Jones today, led downward by JPMorgan Chase, which has lost 2.6%. After the market close on Friday, JPMorgan submitted its quarterly report to the Securities and Exchange Commission. In its outlook for 2014, management commented that for its fixed income and equities business, management expects that due to "a continued challenging environment and lower client activity levels, expect 2Q14 Markets revenue to be down approximately 20% versus 2Q13. The Markets revenue actual results will depend heavily on performance throughout the remainder of the quarter, which can be volatile." Because this business segment constitutes such a large part of JPMorgan's overall business, analysts from Morgan Stanley, Citigroup, and Nomura securities all lowered their price targets on the bank.

Trading revenues are key to large banks' performance, which is why fellow Dow stock Goldman Sachs is down 1.8%, Morgan Stanley is down 2.3%, and Citigroup is down 1.3%.

Source: Finviz.com.

Wells Fargo is the one major bank not falling today, as trading makes up a small portion of its revenue compared to the other banking giants, which are more focused on the capital markets.

A second factor weighing on banks today is U.S. Attorney General Eric Holder's weekly video on the Department of Justice's website. This week's installment is called "No Company or Individual is 'Too Big to Jail.'" The Department of Justice noted: "As the Justice Department continues to pursue several important investigations, the Attorney General asserted that no individual or company, no matter how large or how profitable, is above the law. He intends to reaffirm that principle in the weeks ahead."

Analysts suspect this video foreshadows a Department of Justice announcement of lawsuits against certain big banks in the coming weeks. Rumors have it that charges will be filed against BNP Paribas for violating sanctions against Iran and Sudan. Another lawsuit that's expected is against Credit Suisse for providing illegal tax shelters for U.S. citizens trying to hide assets from the government. While those are expected, the Department of Justice can sometimes surprise us in who they go after, so we will have to wait and see.

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  • Report this Comment On May 05, 2014, at 3:48 PM, Hansen wrote:

    JPMorgan said in a regulatory filing on Friday that “a continued challenging environment and lower client activity levels” were the chief reasons causing its revenues to fall more than anticipated http://goo.gl/AZ581R

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