What happened
Shares of most of the large U.S. banks took a hit Thursday along with the broader markets in the wake of news that Russian troops had invaded Ukraine. JPMorgan Chase (JPM -1.21%), Bank of America (BAC -0.72%), and Wells Fargo (WFC -1.44%) were all down by about 4% as of 11 a.m. ET.
So what
Russian President Vladimir Putin declared early Thursday that he planned a "special military operation" in Ukraine. Shortly after, media outlets reported numerous explosions in Ukrainian cities, and incursions by Russian forces throughout the country.
The Dow Jones Industrial Average had fallen by about 600 points as of this writing, while the Nasdaq Composite, which initially fell 3%, pared back its losses and now is only down by about 0.3%. The S&P 500 also opened sharply lower, then recovered to a level about 1% below Wednesday's closing value. The price of oil at one point Thursday morning reached $105 per barrel, and the yield on the 10-year U.S. Treasury bill fell to about 1.94%.
"The world is shocked as Russia launches a major military offensive against Ukraine," ING Groep analysts said in a research note that was reported by CNN. "Financial markets are predictably witnessing a flight to safety and may have to price in slower growth on the further spike in energy prices."
With JPMorgan, Bank of America, and Wells Fargo so tightly linked to the overall state of the economy, it is no surprise that their stocks are suffering. Additionally, bank stock prices are heavily correlated with the yield on the 10-year Treasury because many loan yields are also influenced by that rate, as well as other longer-term interest rates.
But Russia's invasion of Ukraine could create a bit of a conundrum for the Federal Reserve. The central bank is likely to raise the benchmark fed funds rate at its March meeting as it begins to push back against surging inflation. It's clear the market has been factoring an anticipated series of Fed interest rate hikes into stock prices.
However, Russia's aggression, the sanctions that the U.S. and other NATO members are apt to impose in response to it, and the related disruptions to global trade that will ensue, could constrain the world's oil supply, leading to even higher prices.
"Oil is probably up $10 or $15 a barrel because of the conflict... That will probably add, if sustained, about 30 or 40 cents a gallon to unleaded," Moody's Chief Economist Mark Zandi told CNBC. "That's as much as a half-percentage point to year-over-year consumer inflation, and we're already at 7.5%. My sense is it really complicates the Fed's efforts to rein in inflation and get back to full employment."
Now what
Putin has been hard to predict, so I am certainly not going to make any guesses about how long this conflict might last, or how it will end.
In terms of JPMorgan, Bank of America, and Wells Fargo, bank stocks are typically seen as hedges against inflation because rising interest rates can drive their revenues higher. But too much inflation can also hurt banks because it drives down consumer and business demand for loans, and can also increase default rates. The current situation with Russia may make it tougher for the Fed to balance its efforts to bring inflation back under control with its desire to avoid tipping the country into a recession.
But I do not see any of these bank stocks being in any significant danger. All of these financial institutions are well-capitalized, and their responses to the pandemic demonstrated that they are more than capable of steering their operations through a sudden downturn. As such, I still feel good about the long-term stability of JPMorgan, Bank of America, and Wells Fargo, and feel confident about their stocks.