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Wall Street's Future Points to More Trouble for the Dow

By Dan Caplinger – Feb 25, 2014 at 9:02PM

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The Dow's consumer-oriented financial stocks held up well today, but Wall Street banks could point to further problems for the markets.

On Tuesday, the Dow Jones Industrials (^DJI -0.73%) finished down 27 points, giving back just a portion of their gains from yesterday. Yet even though the decline barely put a dent in the 800-point gains the Dow has seen so far in February, some of the Dow's biggest decliners today, including Goldman Sachs (GS -1.20%) and JPMorgan Chase (JPM -1.33%), suggest that leadership among the Dow's financial stocks could be waning. That in turn could bring on another leg down in the correction that began for the Dow in January.

Much of the discussion around Goldman today centered on the discovery of who was behind a Twitter account that shared alleged quotes from Goldman employees on the company's elevators. The incident has captured the attention of the general public, accentuating passionate opinions about Goldman's role in the financial crisis and its treatment both during and after the market meltdown in 2008.

For JPMorgan, though, today's 1.7% decline followed an announcement of 8,000 layoffs tied to the company's retail banking and mortgage businesses, as well as cuts to its guidance on returns on tangible common equity. Rising rates have crushed refinancing volume, making unnecessary many of the employees the bank brought on to handle much higher volume when rates were falling. The moves are only part of the massive strategic shift that JPMorgan is making to optimize its business, as the company has gotten out of or has plans to leave areas like the pre-paid card industry and the commodities business.

In short, JPMorgan believes that the investment-banking business has growth potential, but the poor reception that the company got shows a lack of faith among investors that the strategy will actually work. In all likelihood, Goldman's decline of 1.8% was tied to the same issues, given that the two companies share many of the same challenges and opportunities in investment banking.

Will the problems spread?
At least today, consumer-oriented financial stocks American Express (AXP 0.30%) and Visa (V -0.83%) didn't get hurt by JPMorgan's news, which makes sense given their lack of exposure to the investment-banking world. Yet given the role that finance plays throughout corporate America, weakness in JPMorgan and Goldman -- if it persists -- could be a warning sign for trouble to come elsewhere in the U.S. economy and its stock market.

Dan Caplinger owns warrants on JPMorgan Chase. The Motley Fool recommends American Express, Goldman Sachs, and Visa and owns shares of JPMorgan Chase and Visa. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,180.08 (-0.73%) $-249.80
Goldman Sachs Group Stock Quote
Goldman Sachs Group
GS
$376.00 (-1.20%) $-4.58
JPMorgan Chase & Stock Quote
JPMorgan Chase &
JPM
$133.36 (-1.33%) $-1.80
American Express Stock Quote
American Express
AXP
$157.22 (0.30%) $0.47
Visa Stock Quote
Visa
V
$215.85 (-0.83%) $-1.80

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

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