Bulletin
Investor Alert

Aug. 14, 2019, 3:13 p.m. EDT

Bank stocks take a beating as inverted yield curve fuels recession fears

All 68 components of the financial sector ETF traded lower, as Citigroup’s stock led the banks lower

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Financial Select Sector SPDR ETF (XLF)
  • X
    SPDR S&P Bank ETF (KBE)
  • X
    SPDR S&P Regional Banking ETF (KRE)

or Cancel Already have a watchlist? Log In

By Tomi Kilgore, MarketWatch


Getty Images

Bank stocks traded broadly, and in many cases sharply lower, as the spread between yields on 2-year and 10-year Treasurys briefly turned negative for the first time since the financial crisis, fueling fears that a credit crunch and recession were looming.

The SPDR Financial Select Sector exchange-traded fund /zigman2/quotes/209660484/composite XLF +0.27%  sank 3.1%, with all 68 equity components losing ground. Within subsectors, the SPDR S&P Bank /zigman2/quotes/201006419/composite KBE +0.17%  slumped 2.9% with all 90 components falling and the SPDR Regional Bank ETF /zigman2/quotes/200108291/composite KRE +0.18%  shed 2.8% will all 122 components declining.

The selloff comes as the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.95%  dropped 2.4% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.80%  tumbled 652 points, or 2.5%. Financials were the third-highest weighted sector in both indexes, with a 13.2% weighting in the S&P 500 and a 15.3% weighting in the Dow.

An inverted yield curve refers to when yields on shorter-term Treasury notes cross below longer-term Treasury yields. One of the most closely watched yield curve measures is the 2s-10s spread, as inversions have very often preceded recessions, as it indicates that monetary policy and financial conditions are too tight to support economic growth.

See Bond Report : 2-year/10-year Treasury curve inverts, triggering bond-market recession indicator.

/zigman2/quotes/209660484/composite XLF 29.75, +0.08, +0.27%

For banks, an inverted curve can hurt earnings and act as a drag on lending, as the usual practice of taking on shorter-term liabilities to fund longer-term assets, like loans, can start costing banks money.

John Lynch, chief investment strategist for LPL Financial, said the yield curve inversion “sends an important signal” to the Federal Reserve. “U.S. monetary policy is clearly still too tight, even after last month’s 25 basis point (0.25%) rate cut, given trade uncertainty and signs of slowing global growth,” Lynch wrote in a note to clients.

Also read : Fed cuts interest rates by quarter point, but rules out significant easing.

While Lynch said that he’s not convinced a recession is imminent, given that recent data has showed that the U.S. economy is on “solid” footing, he acknowledged that “recessions can be self-fulfilling prophecies of market sentiment,” and investors should take that risk seriously.

See related : The U.S. Treasury 2-10 year yield curve inverted and that means stocks are on ‘borrowed time,’ says BAML.

Among individual bank stocks, Citigroup Inc. /zigman2/quotes/207741460/composite C +0.76%  dropped 5.0% toward a 4 1/2-month low, and was the biggest decliner in bank ETF. Among other more-active stocks, Bank of America Corp. /zigman2/quotes/200894270/composite BAC +0.70%  fell 4.6%, JPMorgan Chase & Co. /zigman2/quotes/205971034/composite JPM +0.72%  gave up 3.8%, Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC +0.58%  shed 3.5% and KeyCorp /zigman2/quotes/202852742/composite KEY +0.53%  slid 2.0%.

Elsewhere, shares of Regions Financial Corp. /zigman2/quotes/202396577/composite RF +0.49%  lost 3.8%, Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +0.37% fell 3.7%, Morgan Stanley /zigman2/quotes/209104354/composite MS +0.78%  declined 3.2% and Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW +2.24%  was down 2.2%.

If there is a bright side, the weakness in the financial sector could result in more merger activity for banks, according analyst Jennifer Demba at SunTrust Robinson Humphrey.

The three banks Demba highlighted as having “significant franchise value” are Regions Financial, Synovus Financial Corp. /zigman2/quotes/209053698/composite SNV +1.03%  and Ameris Bancorp. /zigman2/quotes/208317759/composite ABCB +0.14%  

/zigman2/quotes/209660484/composite
US : U.S.: NYSE Arca
$ 29.75
+0.08 +0.27%
Volume: 30.10M
Nov. 15, 2019 8:00p
loading...
/zigman2/quotes/201006419/composite
US : U.S.: NYSE Arca
$ 45.94
+0.08 +0.17%
Volume: 993,950
Nov. 15, 2019 8:00p
loading...
/zigman2/quotes/200108291/composite
US : U.S.: NYSE Arca
$ 55.98
+0.10 +0.18%
Volume: 3.68M
Nov. 15, 2019 8:00p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,120.46
+29.35 +0.95%
Volume: 0.00
Nov. 15, 2019 5:04p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,004.89
+222.93 +0.80%
Volume: 288.91M
Nov. 15, 2019 5:04p
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 74.40
+0.56 +0.76%
Volume: 10.30M
Nov. 15, 2019 6:30p
P/E Ratio
9.87
Dividend Yield
2.74%
Market Cap
$162.43 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 32.93
+0.23 +0.70%
Volume: 36.41M
Nov. 15, 2019 6:30p
P/E Ratio
12.18
Dividend Yield
2.19%
Market Cap
$296.21 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 129.53
+0.93 +0.72%
Volume: 10.16M
Nov. 15, 2019 6:30p
P/E Ratio
12.78
Dividend Yield
2.78%
Market Cap
$406.27 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.80
+0.31 +0.58%
Volume: 15.23M
Nov. 15, 2019 6:30p
P/E Ratio
11.61
Dividend Yield
3.79%
Market Cap
$227.54 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/202852742/composite
US : U.S.: NYSE
$ 18.97
+0.10 +0.53%
Volume: 6.03M
Nov. 15, 2019 6:30p
P/E Ratio
11.71
Dividend Yield
3.90%
Market Cap
$18.68 billion
Rev. per Employee
$402,805
loading...
/zigman2/quotes/202396577/composite
US : U.S.: NYSE
$ 16.52
+0.08 +0.49%
Volume: 8.15M
Nov. 15, 2019 6:30p
P/E Ratio
11.04
Dividend Yield
3.75%
Market Cap
$15.94 billion
Rev. per Employee
$320,096
loading...
/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 220.25
+0.82 +0.37%
Volume: 1.69M
Nov. 15, 2019 6:30p
P/E Ratio
9.85
Dividend Yield
2.27%
Market Cap
$77.99 billion
Rev. per Employee
$1.34M
loading...
/zigman2/quotes/209104354/composite
US : U.S.: NYSE
$ 48.99
+0.38 +0.78%
Volume: 6.44M
Nov. 15, 2019 6:30p
P/E Ratio
10.45
Dividend Yield
2.86%
Market Cap
$79.30 billion
Rev. per Employee
$831,709
loading...
/zigman2/quotes/201281754/composite
US : U.S.: NYSE
$ 44.35
+0.97 +2.24%
Volume: 7.06M
Nov. 15, 2019 6:30p
P/E Ratio
16.43
Dividend Yield
1.53%
Market Cap
$56.87 billion
Rev. per Employee
$563,538
loading...
/zigman2/quotes/209053698/composite
US : U.S.: NYSE
$ 38.18
+0.39 +1.03%
Volume: 1.82M
Nov. 15, 2019 6:30p
P/E Ratio
11.30
Dividend Yield
3.14%
Market Cap
$5.60 billion
Rev. per Employee
$350,431
loading...
/zigman2/quotes/208317759/composite
US : U.S.: Nasdaq
$ 43.60
+0.06 +0.14%
Volume: 155,748
Nov. 15, 2019 4:00p
P/E Ratio
15.15
Dividend Yield
1.38%
Market Cap
$3.04 billion
Rev. per Employee
$293,335
loading...

Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

This Story has 0 Comments
Be the first to comment
More News In
Industries

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.