Another Big Dow Drop Raises Correction Fears as Goldman Sachs, JPMorgan Chase Fall

Earnings reports and economic data gave conflicting reads on the U.S. economy, sending the Dow Jones Industrials downward in confusion.

May 15, 2014 at 11:00AM

On Thursday morning, the Dow Jones Industrials (DJINDICES:^DJI) were buffeted by a number of different reports giving conflicting information on the health of the stock market and the U.S. economy. A troubling drop in industrial production combined with rising consumer prices and weak confidence figures from homebuilders contributed to a general sense of unease, even though conditions in the labor market and in the manufacturing sector in a couple key regions of the country were better than expected. As of 11 a.m. EDT, the Dow was down 148 points. Looking beyond the major Dow components reporting earnings last night and this morning, financial stocks took an outsized share of the stock market hit this morning, as Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) were among the top Dow decliners.


Clearly, issues such as homebuilder confidence that affect the housing sector have a big impact on banks such as JPMorgan Chase and Goldman Sachs. Concerns about housing affordability and rising interest rates have weighed on JPMorgan's mortgage business, and even though interest rates have fallen back recently to their lowest levels of 2014, few believe that the modest rate reduction will lead to a massive resurgence of homebuying activity or mortgage refinancing. For Goldman Sachs, the impact is less direct, as the investment bank doesn't do an appreciable amount of business in the mortgage lending arena. But given that mortgage-backed fixed-income securities make up such a big part of the overall bond market, Goldman needs a healthy housing sector in order to keep that market functioning smoothly and create opportunities for its fixed-income trading operations to take advantage of favorable conditions in the mortgage market.

Yet today's news alone isn't the only factor affecting Goldman Sachs and JPMorgan Chase. Both face the question of how to meet capital requirements without sacrificing too much of their growth potential. Under the Basel III convention, as well as added requirements from U.S. regulators, big banks must make meet minimum capital reserve amounts, with new rules boosting those minimum limits and requiring banks to raise tens of billions of additional capital over the next four years. In the long run, every dollar of bank capital required to remain on the books is a dollar that can't be used for more profitable activities like lending, and that could hamstring JPMorgan Chase and Goldman Sachs in their efforts to return earnings to pre-crisis levels.

As fears of a correction in the Dow Jones Industrials mount, investors should keep their eyes on financial stocks. As much as the general public has grown to despise the banking sector, JPMorgan Chase, Goldman Sachs, and the other banks both within and outside the Dow Jones Industrials will be a necessary component of the growth of the U.S. economy.

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Dan Caplinger owns warrants on 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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