What happened
After a week or so of relatively strong performance, the stock market is in the red on Wednesday. As of 11 a.m. EDT, the Dow Jones Industrial Average is down by 2.4% and the S&P 500 benchmark index is 2.8% lower.
As we've witnessed several times throughout the recent market downturn, the financial sector is getting hit even harder than the broader market. All of the "big four" U.S. bank stocks are underperforming the market -- JPMorgan Chase (JPM 0.49%) and Bank of America (BAC -0.13%) are both down by about 5% while Citigroup (C -0.32%) and Wells Fargo (WFC -0.56%) are the laggards with 7% declines.
Image source: Getty Images.
So what
Today's lousy performance by the banks is likely a combination of falling interest rates, which don't seem primed to recover anytime soon, and recession fears. The benchmark 10-year Treasury yield plunged to below 0.6% on Wednesday, and falling rates typically translate to lower profit margins for banks. Recessions typically cause an uptick in loan defaults, as well as lower demand for new loans.
To make matters worse, analysts have been cutting their price targets on these bank stocks, with a handful of additional reductions today.
Now what
The pressure on bank stocks is likely to persist until we get a clearer picture of just how bad the U.S. recession is going to be and how long it's going to last. Until that happens and for as long as interest rates remain near record lows, bank stocks may continue to underperform the market, although this could be a nice opportunity for long-term investors who have patience to ride out the ups and downs.
