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Here's Why Wells Fargo, Citigroup, and Other Bank Stocks Are Soaring Friday

By Matthew Frankel, CFP® – Jun 5, 2020 at 12:07PM

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The market is having an excellent day, but the banks are a standout.

What happened

The stock market continued its remarkable rally on Friday, thanks to a blowout jobs report and general optimism about the economic recovery as states continue to reopen. As of 10:50 a.m. EDT, the Dow Jones Industrial Average and S&P 500 were higher by 2.8% and 2.3%, respectively.

The financial sector was one of the market's strongest performers, and big bank stocks in particular were having a strong day. Citigroup (C -1.70%) was leading the group with an 8% gain, while Wells Fargo (WFC -0.69%), Bank of America (BAC -1.50%), and U.S. Bancorp (USB -1.01%) were all up by more than 6%.

Exterior of a Wells Fargo branch.

Image source: Wells Fargo.

So what

The major catalyst sending bank stocks higher today is the May jobs report. And to put it mildly, the numbers were a big surprise. After reaching an unemployment rate of 14.7% in April, economists expected the U.S. economy to lose another 8.3 million jobs last month, which would send the unemployment rate soaring to 19.5%.

What we actually got was another thing entirely. The economy added 2.5 million jobs in May -- the largest one-month increase in history. That's a difference of nearly 11 million from the expectation. As a result, the unemployment rate improved to 13.3%. And the hardest-hit parts of the economy reported the best gains. Specifically, bar and restaurant jobs increased by 1.4 million as states began to allow these establishments to reopen, and the leisure and hospitality industries added 1.2 million jobs as well.

The data shows that the job losses that occurred as the COVID-19 pandemic forced the economy to grind to a halt weren't as numerous or as permanent as previously thought. Seventy-eight percent of people who had lost their jobs as a result of the pandemic said in April that they believed their situation would be temporary, and that appears to be true for some.

Now what

Here's why this matters to the big banks. As the pandemic began, bank stocks were one of the hardest-hit parts of the market. If unemployment were to spike to 20% or more, or if the economic effects of the pandemic ended up lasting longer than expected, millions of consumers could run into trouble paying their bills, leading to a surge in loan defaults and losses for banks. In fact, all of the big banks set aside billions in the first quarter in anticipation of this.

Now that it looks like the employment situation in the U.S. is coming back quicker than expected and a so-called V-shaped recovery seems more likely than it previously did, there's less of a chance that we'll see a massive spike in losses. In short, the more people that we can get back to work before the government's additional unemployment support runs out at the end of July, the better. And today's jobs report shows that's exactly what is happening.

Matthew Frankel, CFP owns shares of Bank of America and US Bancorp and has the following options: short September 2020 $25 puts on US Bancorp. 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.
$41.67 (-1.70%) $0.72
Bank of America Corporation Stock Quote
Bank of America Corporation
$30.20 (-1.50%) $0.46
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$40.22 (-0.69%) $0.28
U.S. Bancorp Stock Quote
U.S. Bancorp
$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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