The Dow Jones Industrials (DJINDICES: ^DJI ) couldn't get any positive momentum on Friday; even though it's resting just below its record closing level, the index hasn't shown any signs today of giving investors its second all-time high of 2014. As of 12:30 p.m. EDT, the Dow was barely under breakeven, reacting to economic data that showed a greater than expected gain in wholesale inventories. Rising inventories suggest that suppliers aren't shipping as many wholesale goods to their customers, although after the brutal winter in much of the U.S., wholesalers have to hope that demand will rise and that inventory levels will return to more normal levels. Still, slightly more Dow stocks fell than rose, with JPMorgan Chase (NYSE: JPM ) and Goldman Sachs (NYSE: GS ) providing good examples of the pressure that financial stocks are under today.
Some of the declines in the Dow's financial stocks came from company-specific issues. Goldman Sachs had news on two different legal fronts, as it confirmed that it's being investigated in connection with its international hiring practices and also will face federal scrutiny for its high-frequency trading unit. On the hiring front, earlier news reports had said the SEC was looking at Goldman Sachs and a number of other U.S. and international financial institutions in connection with allegedly hiring relatives of foreign government officials with the expectation of favorable treatment from those officials. Meanwhile, the Justice Department's high-frequency trading probe will see whether the practice itself violates laws against insider trading, which will turn on whether Goldman Sachs gets material nonpublic information as a result of its HFT setup.
But perhaps the bigger issue affecting the long-term prospects of JPMorgan Chase, Goldman Sachs, and several other big banks is the proposed Federal Reserve rule that would limit banking mergers. Aimed squarely at too-big-to-fail banks like Goldman and JPMorgan, the Fed rule announced yesterday wouldn't allow a merger if the combined company's liabilities would be greater than 10% of the total of all financial companies. With bank holding companies, depository institutions, and other systemically important financial institutions subject to the rule, the wave of consolidation we've seen in other industries would effectively be unavailable for the largest banks. That could prove especially difficult for many banks, especially as JPMorgan Chase tries to recover from the loss of refinancing income in light of higher rates, and as both JPMorgan and Goldman Sachs deal with weakness in their trading operations.
One thing is clear: if the bull market is to continue, the Dow will need the financial sector to pick up steam. That not impossible, as even if mergers might no longer be the answer for JPMorgan Chase, Goldman Sachs, and other big banks, opportunities to enhance efficiency and squeeze out more profits from existing business lines should give those institutions a chance to shine even under greater regulation. But it just poses one more challenge for JPMorgan and Goldman to overcome.
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