The stock market is having another rough day Monday, with the Dow Jones Industrial Average and S&P 500 benchmarks down by 4% and 3%, respectively, at 3:15 p.m. EDT after the Senate failed to agree on a stimulus effort.
As we've seen several times during the coronavirus market downturn, the financial sector is getting hit worse than most. Some of the big bank stocks are falling quite dramatically, with Bank of America (NYSE:BAC) and Citigroup (NYSE:C) both down by nearly 8%.
In a nutshell, the longer the coronavirus pandemic drags on and the longer Congress takes to act, the worse recession fears are going to get. And banks can get hit in a few big ways:
- The near-shutdown of the economy will undoubtedly hurt demand for loans.
- Higher unemployment could lead to higher default rates, as consumers have trouble paying existing loans.
- Interest rates have plunged, and this is likely to put tremendous pressure on interest margins. Banks make money primarily by paying a low interest rate on consumer deposits and charging relatively high rates for loans and profiting from the difference in rates. Lower market interest rates typically lead to lower profit margins.
Nobody can predict how long the coronavirus outbreak will last, how deep the recession will be, or what measures the federal government will take to protect the U.S. economy. If the pandemic starts to blow over or a massive stimulus package passes, it could be a positive catalyst for the bank stocks, but if the recession is deeper than expected, there could still be more room to the downside.