What happened
The stock market opened sharply higher on Tuesday following the long Memorial Day weekend. As of 10:45 a.m. EDT, the Dow Jones Industrial Average was higher by 2.5%, while the benchmark S&P 500 index was up by 1.9% and traded above the key 3,000 level for the first time since early March.
Bank stocks were some of the strongest performers. Citigroup (C 1.41%) and Wells Fargo (WFC 2.74%) were leading the big U.S. banks, higher by 8.2% and 6.3%, respectively. Bank of America (BAC 3.35%) and JPMorgan Chase (JPM 2.51%) were both higher by more than 5%. And investment banking giants Goldman Sachs (GS 0.22%) and Morgan Stanley (MS 0.44%) were both up by more than 6%.
Image source: Getty Images.
So what
In a nutshell, the financial sector is rising for the same reasons as the overall stock market, but these reasons have greater implications for the banking business, which is why we're seeing such outperformance.
One major news item causing stocks to move higher is optimism about a coronavirus vaccine becoming widely available sooner rather than later. Following Moderna's (MRNA -0.58%) positive news last week, Novavax (NVAX 2.06%) announced on Monday that its vaccine candidate had entered human trials. This means that there are now 10 vaccines in clinical trials and another 114 in pretrial evaluations.
Furthermore, all U.S. states have now started to reopen their economies, and the early data is promising. We're not seeing any massive spikes in new COVID-19 cases in states that have been open for several weeks, and data on credit card spending, air travel, and more shows that consumers are starting to resume economic activity.
Finally, we got a glimpse at May's consumer confidence data on Tuesday, and the numbers look quite good. Not only did the consumer confidence index rise to 86.6 in May from 85.7 in April, but this number was significantly higher than the 82.3 that economists had been expecting. While this level of consumer confidence certainly isn't at prepandemic levels, it indicates that consumers might be in better financial shape and could be more willing to get out and spend money than previously thought.
Now what
Banks have been one of the worst-performing parts of the market during the COVID-19 pandemic. Not only are record-low interest rates creating a poor environment for bank profitability, but a prolonged recession and spiking unemployment could lead to a wave of loan losses for financial institutions.
So why is all of today's news helping to lift bank stocks higher? Banks are heavily dependent on consumers' willingness and ability to get out and spend money, and their ability to pay their bills. A smoother and faster reopening than originally anticipated could mean that the uptick in banks' loan losses could be relatively mild, and higher-than-expected consumer confidence could mean that the average U.S. consumer is in better financial shape than many experts thought, and the economic recovery could happen quickly.
