What happened
Shares of several major financial and bank stocks traded with volatility today along with broader markets, as investors seemed confused on how to play rising inflation and upcoming policy decisions at the Federal Reserve. The Dow Jones Industrial Average at one point today had fallen more than 1,000 points before finishing the day in the green.
Shares of the payments company Visa (V -1.70%), money center bank Citigroup (C -1.88%), and investment bank Goldman Sachs (GS 2.92%) all fell nearly 5% today before clawing back most of those losses. Visa finished the day only about 2% down, Citigroup ended less than 1% down, and Goldman closed nearly flat.
So what
Inflation has forced the Federal Reserve to move up its timeline on key policies such as the tapering of its bond-buying program, interest rate hikes, and whether or not to shrink its balance sheet.
At the beginning of November, the Fed began to get more serious about raising its benchmark overnight lending rate to combat the big rise in inflation, and markets began to take the Fed seriously as well. It then began to taper the billions of monthly bond purchases it started making at the onset of the pandemic and prepare for rate hikes to begin as soon as March. Six months ago, very few investors could have foreseen the Fed moving this quickly.
Image source: Getty Images.
The Fed has also spoken about shrinking its balance sheet after it begins rate hikes, a move that similarly ended in disaster in 2019, although the economy is certainly in a very different place today.
Banks and financial stocks tend to benefit from rate hikes because most banks are asset sensitive, meaning more of their loan yields reprice higher with the federal funds rate than the yields they pay on customer deposits. But too much inflation can also hurt banks by slowing loan demand and spending, leaving banks with higher deposit costs, slimmer margins, and potentially higher loan defaults as well. High interest rates can also hurt mergers and acquisition activity, which cuts into investment banking revenue at Citigroup and Goldman.
There just seems to be a lot of conflicting factors at play in the economy with headwinds like inflation, future rising rates, and the Fed potentially shrinking its balance sheet, coupled with tailwinds such as a financially strong consumer and economy that is expected to grow at a very strong pace this year. I think investors and analysts are struggling to find direction given all these factors.
Visa, Citigroup, and Goldman Sachs all seemed to struggle today more so than the KBW Nasdaq Bank Index, which tracks large bank stocks. I think investors are concerned about Citigroup and Goldman Sachs in particular, because both reported disappointing earnings results for the fourth quarter of 2021 on the back of higher expenses, largely as a result of wage inflation.
For Visa, investors still seem to be worried about smaller economic growth, volatility, and a full recovery from the pandemic. Morgan Stanley analyst James Faucette sees opportunity in payments stocks because "earnings could be materially higher if international tourism were to recover fully." However, Faucette added, "We anticipate that the market will likely be conservative in extrapolating generally improving travel conditions," and that the market may wait for interest rates to stabilize.
What now
Among these three stocks, I certainly think there is good opportunity. Specifically, and as I've has written in the past, I do think Citigroup has a lot of upside with the turnaround story going on at the bank right now and the stock trading at beaten-down levels.
Trading at less than six times earnings, Goldman is another stock I like because the opportunity in investment banking is larger than before the pandemic, and Goldman is making good progress building up its consumer banking business, which will generate more consistent earnings.
Because payments are becoming so digitized, I also suspect there is a good opportunity in Visa as well, but a normalization for Visa may take longer than for other companies.
