What happened
The stock market is rallying for a third consecutive day after the $2 trillion stimulus package was agreed upon by key leaders. As of 11 a.m. EDT, the Dow Jones Industrial Average and S&P 500 index were up by 4.1% and 3.6%, respectively.
Bank stocks, which got disproportionally hammered in the coronavirus-fueled downturn, are having an even better day than the major indexes. JPMorgan Chase (JPM 0.47%), Bank of America (BAC 0.10%), and Citigroup (C 1.68%) were all up by more than 5% for the day so far.
It's also worth mentioning that the rally in bank stocks is despite Treasury yields falling on Thursday, which is typically a negative catalyst for the financial sector.
The stimulus bill will provide millions of Americans with financial relief, and that's a good thing for banks. Image source: Getty Images.
So what
The stimulus will provide cash payments to the vast majority of American households, expands the value of unemployment benefits as well as the number of people eligible to receive them, defers student loan payments for six months, and puts a hold on most evictions and foreclosures for several months. This combination of things is likely to be good for banks for a couple of reasons.
First and foremost, the stimulus bill puts money in the hands of most Americans and provides greatly enhanced financial help to those who have lost their jobs as a result of the COVID-19 pandemic. This means that fewer people will have difficulties paying their mortgages, auto loans, and credit cards, so bank loan delinquencies and defaults may not get as bad as markets initially feared.
During the 2008-2009 financial crisis, for example, banks were writing off bad loans at unprecedented levels. The net charge-off rate for U.S. banks peaked at over 3% during the first quarter of 2010 (for context, it sits at 0.49% today). While 3% may not sound like much, consider that U.S. mortgage debt is currently about $15.8 trillion, and other forms of consumer debt total another $4.2 trillion, so a percentage point or two could lead to devastating losses for banks. The stimulus goes a long way to ensure this doesn't happen again.
In addition, the combination of generally lower interest rates and additional financial security could create higher-than-expected demand for new loans, especially if the outbreak peaks in April and business as usual can resume by the summer, as many experts are predicting.
Now what
To be clear, all three of these banks are still a long way off their recent highs, and for good reason. There's simply no way to know when the coronavirus pandemic will start to subside, how long the economy will be nearly shut down, and how consumer demand will react when the U.S. can start to get back to business. The stock market hates uncertainty, and there's still quite a bit of it.
However, the stimulus certainly helps calm things down, at least on the economic side of the pandemic. Until we actually see the coronavirus infection numbers start to move in the right direction, the banks aren't out of the woods. But the stimulus will definitely help them weather the storm.
