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Banks Rally as the Dow Fights to Hold On

By Jessica Alling - Apr 15, 2013 at 12:00PM

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Does more disappointing economic news point to a big problem ahead for the Dow?

The Dow Jones Industrial Average (^DJI -3.57%) is struggling to hold on to the gains it made last week, falling as much as 108 points this morning. Sitting at a 65-point loss at 11 a.m. EDT, the index is suffering from another batch of disappointing economic news from both inside and out of the U.S. On the other hand, two of the Dow's few winners this morning are reaping the rewards of positive earnings news from a rival.

Seasonal slump?
This morning's news that homebuilders' confidence fell for the third month in a row, as well as news of reductions in New York manufacturing, was another blow to the Dow and the economy in general. For the past two weeks, the markets have endured report after report of softening growth in the economy, spurring some analysts to believe that we've hit a seasonal slowdown.

Analysts had anticipated a rise in builder confidence, with the expected increase to result in a reading of 45. Instead their confidence brought down the reading by a point to 43 -- a six-month low. A result of 50 marks builder sentiment toward economic conditions as favorable. Manufacturing in New York fell drastically according to the Empire State index. While analysts had expected a drop to 7 from March's 9.25, the index fell to 3.05 for April.

Outside the U.S., China's GDP growth has many analysts and investors flustered. The country reported a 7.7% growth in GDP for the first quarter, falling far behind estimates of 8%. 

Taking it to the bank
Bank of America (BAC -3.08%) and JPMorgan Chase (JPM -1.71%) are on the rise this morning, largely due to rival Citigroup's (C -3.39%) stellar earnings report this morning.

BankToday's Gain (as of 11 a.m. EDT)
Bank of America 0.74%
JPMorgan Chase 0.31%
Citigroup 2.97%
Wells Fargo (WFC -3.66%) 0.27%

Source: Yahoo! Finance.

After Friday's earnings reports from JPM and Wells Fargo, many bank investors were concerned that there were weaknesses in the banks' fundamentals -- even though both reported record earnings. Continued pressure on interest rate margins and declining mortgage activity were largely at fault for both banks missing analyst revenue estimates. Today's report from Citi proved that the banks still have opportunities to grow in spite of the current economic challenges.

Citi reported EPS of $1.29, beating expectations of $1.13. The bank also reported its fourth consecutive quarter of increased net interest margins -- a difficult feat in this near-zero-interest-rate environment. Both JPM and Wells had reported declines in their NIMs. As pressure continues to squeeze revenues, Citigroup's progress in loan generation and cost reductions signals improvements that other banks may want to take to heart.

Investors continue to be wary of the banking sector. Both Citi and B of A are considered to be at the bottom of the barrel, but both continue to show progress in rebuilding and growing. Bank of America reports earnings on Wednesday, so the pressure now falls on its shoulders to match Citi's good results.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,490.07 (-3.57%) $-1,164.52
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$49.32 (-3.39%) $-1.73
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.88 (-3.08%) $-1.11
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$120.09 (-1.71%) $-2.09
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$42.11 (-3.66%) $-1.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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