Why Bank Stocks Finally Rose Wednesday

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Bank stocks have had a rough turn-around since the U.S. stock market began rebounding from the pandemic-driven bear market. And while they’ve lagged in the past month, they were outperforming in the afternoon Wednesday. 

The Invesco KBW Bank ETF  (KBWB) - Get Report rose 1.5% by 2 pm, while the S&P 500 was up about 0.5% and the Vanguard S&P 500 Value ETF  (VOOV) - Get Report, comprised of many cyclical stocks, rose 0.46%. 

Tuesday, banks were the only cyclical sector to fall, down 0.5%. Between Tuesday and Wednesday, cyclicals like consumer discretionary, oil and industrials have risen. The reason for the poor bank performance: The 10-Year Treasury yield fell to 0.50% Tuesday from 0.55% Monday. The yield curve compressed significantly. Banks borrow short and lend long, so the interest received over the interest paid is key to banks’ profitability. Cyclicals have been supported by strong earnings reports and some optimism on the speed of the economic recovery, although that has its headwinds. But the treasury market is signaling bearishness on the speed of the recovery and therefore bearishness on loan volumes, while a compressing yield curve is an obvious negative for banks. 

Yes, earnings are rolling in and beating estimates, but data from RBC Capital Markets shows that only about 40% of S&P 500 companies are rising after earnings, even though roughly 80% are beating estimates -- and handily. The second quarter is expected to mark the trough of the earnings decline for the year, something that’s more than evident on earnings this season. Expectations going into earnings were for a 45% decline on the S&P 500, but the average company on the index is tracking at a 35% decline. That, combined with positive news on the vaccine front, is supporting sentiment. But the market knows -- and it’s evident in the vague guidance and tepid commentary from many companies -- that the paused state reopenings and slow fiscal stimulus bill in Congress are threatening the speed of the recovery. 

More broadly, since June 26, the value ETF is up 7.3%. The bank ETF: up just 2.7%. Since that time, the spread between the 10- and 2-year treasury yields has fallen from 0.48 percentage points to 0.42 percentage points. 

Well, let’s check the yield curve action Wednesday. With the 10-year soaring, the spread between the 2 and the 10 rose to 0.42 points from 0.4 points. 

The point: the market is truly feeling tepid about the recovery right now and that’s seen in the bond market and bank stocks. 

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