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Here's Why Wells Fargo Is Plunging on Wednesday

By Matthew Frankel, CFP® – Jun 10, 2020 at 3:54PM

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Comments by the bank's CFO are worrying investors.

What happened

The stock market was having a moderately weak day on Wednesday, with the Dow Jones Industrial Average and S&P 500 down by 0.4% and 0.2%, respectively, as of 1:40 p.m. EDT, while investors were awaiting the Federal Reserve's latest economic outlook.

Financial stocks are among the worst performing parts of the market, and Wells Fargo (WFC -0.99%) is having a particularly bad day, with shares down by nearly 7% for the day.

Wells Fargo banking branch.

Image source: Wells Fargo.

So what

For one thing, bank stocks have been some of the biggest winners in the recent market rally. As a V-shaped economic recovery has started to look more likely, investors seem to be pessimistic that a long recession will lead to loan losses at banks. So before we go any further, it's worth noting that Wells Fargo is up by 20% over the past month even after today's move.

Having said that, the unfortunate reason we're seeing a pullback is that Wells Fargo CFO John Shrewsberry said that the bank expected another large increase in loan loss reserves due to the COVID-19 pandemic. This would be in addition to $3.1 billion the bank added to its loss reserves in the first quarter.

Now what

The main worry investors have in regard to Wells Fargo (or any other bank stock) in the pandemic is a massive spike in loan losses. And while any additional loss reserves could end up being an unnecessary move made out of an abundance of caution, it does seem to be stirring up investor fears.

Matthew Frankel, CFP 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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