By Michael Wursthorn
Investors continued their run on bank stocks, sending shares of some of America's biggest financial institutions sharply lower following the latest sign of trouble ahead for the U.S. economy.
A brief inversion of 10- and two-year U.S. Treasurys early Wednesday sent shock waves through the stock market. Banks were among the hardest hit, as investors worried whether the inversion suggests a recession is likely.
Shares of JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., Wells Fargo & Co., Bank of America Corp. and Goldman Sachs Group Inc. all slid at least 4% Wednesday, outpacing the broad S&P 500's 2.7% decline in recent trading. Including Wednesday's losses, those six banks have lost roughly $132 billion in market-cap value since the end of July.
Wednesday's move in bond yields raised alarms among investors that the U.S. economy, which has been solid most of the year, is faltering. A strong consumer, a robust labor market and low inflation have underpinned the latest stretch of the economic expansion, even as manufacturing activity and other goods producers struggled.
Now, there are concerns that leg of support for the economy, and the stock market, is on the verge of potentially floundering. The inversion of 10- and two-year U.S. Treasurys has been a reliable indicator of an eventual recession for the past 40 years, and analysts say investors are increasingly factoring in the likelihood banks will struggle in that kind of environment.
"It's a slide into something no one wants to see," said Mark Lindbloom, a portfolio manager at Western Asset Management Co., of the inversion. "The sentiment shifts among consumers are now the unknown. Potentially a change there is how you could see a more significant slowdown."
For banks, the move down in yields lowers interest rates, compressing how much they can earn off of lending. Even worse, a broader economic slowdown would likely stifle lending activity, as well as other bank services, further hitting their profits.
Investors aren't taking any chances, pushing shares of most banks and financial institutions lower on Wednesday, so much so that four of those six major banks are trading below their book value. In other words, shares are now trading at a price that doesn't fully reflect the assets on those banks' balance sheets.
Bank of America, Goldman Sachs, Morgan Stanley and Citigroup all traded below their forward-looking book values. Prior to this month, only Citigroup had that distinction. Wells Fargo and JPMorgan shares remain above their book values. But that could change if shares remain under pressure this month.