The stock market is having one of its worst days in years, with the S&P 500 index down by about 6% at 3:50 p.m. EDT, but some sectors are getting hit harder than most. Financials are the second-worst-performing sector in the market, with the Financial Select Sector SPDR ETF (XLF 3.25%) about 10% lower for the day.
And the big bank stocks are down even more. JPMorgan Chase (JPM 6.19%) is having its worst day since the financial crisis, down by 13%. Bank of America (BAC 5.94%) and Citigroup (C 6.07%) are both down by 15%.
There are a few big reasons why bank stocks are being hit so hard. First and foremost are interest rates. Treasury yields plunged to record lows in the midst of Monday's plunge, and banks make the bulk of their money from being able to charge interest to customers for loans. Lower interest rates mean lower profits.
In addition, the fear of a recession could further hurt banks' business by reducing demand for loans. During tough times, people buy fewer cars, homes, and spend less of their credit cards, for example.
Finally, many banks have exposure to the energy sector through their loan portfolios. With oil plunging by nearly 25% on Monday, there could certainly be an uptick in defaults in the commercial loan portfolios of these institutions if the low prices persist.
These things (especially lower interest rates) will almost certainly cause bank profits to take a hit in the near term. However, with rock-solid financial positions and some of the lowest valuations in years (Bank of America is trading for about 20% less than book value), patient long-term investors may want to take a look at some of the best-in-breed bank stocks at these levels.