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Why the Stocks of Big Banks Surged Again Today

By Jason Hall – Updated Apr 29, 2020 at 4:53PM

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Optimism abounds across the market.

What happened?

For the second day this week, megabank stocks are running higher. Shares of Citigroup (C -2.90%)Bank of America (BAC -2.37%), and Wells Fargo (WFC -2.67%) were all up more than 5% in afternoon trading, while shares of the biggest of the big banks, JPMorgan Chase (JPM -1.86%), surged 4% before cooling off to a 2.7% gain at the close.

So what

Today is a big day for most stocks, with investors feeling more optimistic that the economy could start reopening soon. Remdesivir, an antiviral treatment, is going through clinical trials in COVID-19 patients, and some of the early results look positive. Other potential treatments also offer some hope that we could finally start to get ahead of the pandemic in a way that doesn't require the strict social distancing that's forced the global economy to a halt. 

Finger drawing a line that curves higher.

Image source: Getty Images.

In addition to hopefulness around possible treatments for COVID-19, investors remain optimistic that the U.S. government will continue to take action to soften the economic blow from forced shutdowns of so much of the economy. In addition to direct cash stimulus payments and extended unemployment benefits via laws passed by Congress and the White House, the U.S. Federal Reserve continues to say it will use the "full range" of monetary tools at its disposal. The Fed has injected trillions of dollars into the financial system already. 

Now what

While they've all made big gains from the lows in late March, all four big bank stocks are still down between 30% and 44% from their 2020 highs, and the coming quarters are likely to be ugly. They all telegraphed this in their recent earnings filings, when the four took a combined $22 billion in credit costs and loss provisions against expected losses in the quarters to come, compared with $2.6 billion in the year-ago quarter. 

Some 26 million Americans have filed for unemployment over the past month, and U.S. GDP could contract more than 30% in the second quarter. Consumer lending could come to a standstill, and outside of the small-business lending that's being backstopped by the federal government, the crash in economic activity will result in far lower demand for new loans. 

Add it all up, and investors shouldn't buy any bank stocks based on a little bit of optimism about the short term. With that said, all four of these banks are better capitalized today than during the banking crisis a dozen years ago, and their prices do represent a solid value. But only if you're willing to buy now and hold for a recovery that could take longer to materialize than today's optimism makes seem likely. 

Jason Hall owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$44.26 (-2.90%) $-1.32
Bank of America Corporation Stock Quote
Bank of America Corporation
$31.73 (-2.37%) $0.77
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$109.14 (-1.86%) $-2.07
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$40.41 (-2.67%) $-1.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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