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Here's Why Wells Fargo Plunged on Wednesday

By Matthew Frankel, CFP® - May 13, 2020 at 3:55PM

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The worst-performing big U.S. bank just hit a fresh 52-week low.



What happened

The stock market was having a rough day on Wednesday, with the Dow Jones Industrial Average and S&P 500 benchmark index down by 2.6% and 2.4%, respectively, as of 3:20 p.m. EDT. As we've seen throughout the COVID-19 pandemic, when the market falls, financial stocks are among its worst performers.

Wells Fargo (WFC -1.50%) has performed especially poorly today, down by nearly 8% to a new 52-week low.

Man looking at financial charts with hands on back of his head.

Image source: Getty Images.

So what

To be clear, Wells Fargo isn't falling due to any company-specific problems. Instead, today's move is fueled by fears that the economic impact of the COVID-19 pandemic could be worse and longer lasting than feared.

Earlier in the day, Federal Reserve Chair Jerome Powell said that there is "significant downside risk" in the economy, and the central bank will need to take more action to help it recover. And billionaire investor David Tepper said that the stock market is highly overvalued.

Wells Fargo in particular is getting beaten down over economic fears because unlike the other big U.S. banks, it doesn't have an investment banking business (which actually can do better in turbulent markets). Recessions lead to loan defaults, and since it is essentially a giant savings and loans institution, Wells Fargo is likely to get hurt more than its peers in a deep recession.

Now what

While Wells Fargo and other bank stocks are likely to be quite volatile for the duration of the pandemic, there could be value here for long-term investors. After all, Wells Fargo is well capitalized, has strong asset quality, and now has a dividend yield of more than 9% at the current share price.

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