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Stock Market Wrap-Up: The Surprise Leader in Thursday's Rebound

By Dan Caplinger – May 14, 2020 at 5:06PM

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A long-suffering sector finally perked up in today's stock market action.

The stock market rose on Thursday, finally regaining some lost ground from earlier in the week. Even though worries about the economic fallout from the coronavirus pandemic aren't going away anytime soon, investors seemed a little bit more comfortable with the possibility that the federal government and other nations around the world might be able to prevent any economic downturn from reaching depression-level proportions. The Dow Jones Industrial Average (^DJI -1.71%), S&P 500 (^GSPC -1.51%), and Nasdaq Composite (^IXIC -1.51%) ended the day with gains of 1% to 2%.

Today's stock market

Index

Percentage Change

Point Change

Dow

+1.62%

+377

S&P 500

+1.15%

+33

Nasdaq Composite

+0.91%

+81

Data source: Yahoo! Finance.

Financial stocks have largely gotten left out of the rebound in the market since mid-March, with big banks like Wells Fargo (WFC -0.69%), JPMorgan Chase (JPM -1.56%), and Bank of America (BAC -1.50%) remaining well below where they traded at the beginning of 2020. Today, bank stocks finally led the way higher, suggesting to some that now might be a turning point for the ailing sector.

The bullish case for banks

Wells Fargo led the way higher for the big bank sector, as its stock rose 7%. JPMorgan and B of A followed suit with 4% gains, while U.S. Bancorp (USB -1.01%) was up 6% and Citigroup (C -1.70%) posted a 4% jump.

Banks have started getting attention from value investors who believe that the downward moves in the major financial institutions have overextended themselves. Before today's bounce, Wells Fargo had been down almost 60% year to date, while U.S. Bancorp had lost more than half its value. JPMorgan and Bank of America had seen slightly less dramatic drops but had still been down 40% or so from their levels at the beginning of the year.

Savings passbook with pencil, calculator, and cash on a flat surface.

Image source: Getty Images.

The long-term case for banks still looks relatively bullish. Financial institutions are in strong shape from a capital perspective, having been forced to keep reserves at levels that would comply with Federal Reserve stress test requirements. At the same time, the Fed itself is also fulfilling many of the functions that private-sector banking institutions had to do in the financial crisis, with the central bank's status as lender of last resort leading to extraordinary measures like government purchases of individual bonds and bond ETFs.

The big fears about banks

Even with today's gains, though, bank stock worries abound. Here are just a few of the concerns:

  • Falling interest rates have dramatically narrowed the spreads between what banks are paying depositors and what they receive in interest income from borrowers.
  • Unprecedented unemployment levels are putting stress on customers' finances, making it more likely that default rates will rise and loan losses will increase.
  • Big banks have extremely attractive dividend yields based on recent quarterly payouts, but some believe that regulators will force banks to reduce or entirely suspend paying dividends to shareholders because of the coronavirus crisis.

Perhaps most importantly, investors are justifiably concerned that banks won't get the same attention from the federal government that they did in the late 2000s. In essence, major banking institutions have already used up their government bailout opportunity. If they make strategic mistakes now, there'll be nobody inclined to bail them out again.

At least for today, bank stocks showed that there are still some investors who believe in their long-term prospects. The unanswered question, though, is whether today's gains will be a one-day blip or the beginning of a real turnaround for the financial sector.

Dan Caplinger has no position in any of the stocks mentioned. 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

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$30.20 (-1.50%) $0.46
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$104.50 (-1.56%) $-1.66
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.22 (-0.69%) $0.28
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$28,725.51 (-1.71%) $-500.10
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,585.62 (-1.51%) $-54.85
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$41.67 (-1.70%) $0.72
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$10,575.62 (-1.51%) $-161.89
U.S. Bancorp Stock Quote
U.S. Bancorp
USB
$40.32 (-1.01%) $0.41

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

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