Bank stocks were the winners of the Fed Day. Why they were crushed today.

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Jerome Powell

Al Drago / POOL / AFP via Getty Images

Bank stocks rose when the Fed released its June monetary policy statement, which pointed to earlier-than-expected rate hikes. On Thursday, they were among the biggest losers in the market.

There is a good reason for this. Banks usually make money by borrowing money short and lending it long term, and making a profit on the spread. When long-term rates rise faster than short-term rates, bank margins usually improve, while profits deteriorate when the reverse is true.

After yesterday’s meeting, the 10-year yield rebounded sharply – it rose 0.071% to 1.569% – while the two-year yield rose 0.038 percentage point to 0.203%, bringing the spread between two at 1.366 percentage points. This widening made the financial sector in general, and banking stocks in particular, one of the few sectors to react positively to the Fed’s announcement on Wednesday. the


(KBE) increased by 0.9%, while

JPMorgan Chase

(JPM) rose 0.7%, even as the

S&P 500

fell by 0.5%, the

Dow Jones Industrial Average

fell 0.8%, and the

Nasdaq Composite

decreased by 0.2%

The market, however, has changed its mind. The 10-year yield fell to 1.5075%, while the two-year rate rose to 0.2174, bringing the spread to 1.2901 percentage point. This so-called flattening of the yield curve is bad news for a rate-sensitive industry like banks. The S&P Bank SPDR ETF fell 4.5% to $ 51.62, while JPMorgan fell 2.9% to 151.65. The S&P 500 was little changed, while the Dow Jones fell 0.6% and the Nasdaq Composite rose 0.9%.

Why the market about-face? For yields to continue rising, the economy must show that it is recovering quickly. Otherwise, investors will bet on a repeat of the weak growth the United States experienced after the 2008 financial crisis. With jobless claims largely lacking on Thursday and experiencing the first increase after six weeks of decline, the market decided to focus on the latter, not the former, says Evercore ISI strategist Dennis DeBusschere. “The risk to the economic outlook is the sharp turn to the hawkish side, compared to what everyone previously thought, at the same time the job market is not as strong as the Fed assumed,” he writes .

Until that changes, it will be difficult for bank stocks to rebound.

Write to Ben Levisohn at [email protected]

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