Bank stocks struggled today as investors grew more concerned about the economy and the strength of consumers. Shares of JPMorgan Chase (NYSE: JPM), the largest bank in the U.S. by assets, fell 4.5%. Shares of investment banks and asset managers Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) also fell 3.9% and 4.5%, respectively.
Investors aren't ready for a recession
The stock market and the consumer have proven extraordinarily resilient over the last few years, despite high inflation and the Federal Reserve hiking interest rates over 530 basis points (5.3%) in a relatively short period. Although inflation is not at the Federal Reserve's 2% preferred target and some worry that it might revert higher, investors have largely shaken off these concerns this year.
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The threat of a slowdown in the economy or a recession has not been in focus with a strong labor market and economy that seems bulletproof, but signs of a potential recession have rattled the market on a few occasions over the last few years.
That seems to be the culprit behind today's market's sell-off, with the Dow Jones Industrial Average giving up 500 points. Consumer retail giant Walmart (NYSE: WMT), often viewed as a proxy for how people feel about spending, reported earnings this morning along with timid guidance that left investors questioning whether consumer spending may be at or close to a peak. Consumer spending contributes over two-thirds of gross domestic product, so a slowdown can lead to a slowdown in the economy.
"If Walmart is giving bad guidance, you should be paying attention to it," Tom Fitzpatrick, a managing director at R.J. O'Brien and Associates, said, according to CNBC. "Perhaps this is suggesting that the general consumer is tapped out."
In other economic news, St. Louis Federal Reserve President Alberto Musalem said he expects interest rates to remain at current levels until there is further evidence that inflation is moving toward 2%, reiterating what his colleagues have been saying for weeks. President Donald Trump also discussed the possibility of more tariffs, which could prove inflationary if implemented.
There didn't appear to be anything specific impacting bank stocks today other than economic news. Banks are cyclical, so it's not a surprise to see them selling off on concerns over weakened spending. A slower economy or recession can ultimately impact many different businesses at banks, from consumer and commercial lending to investment banking if companies decide to put off mergers and acquisitions or initial public offerings.
Banks are generally well positioned
Given the extent of interest rate hikes over the last three years and previous warning signs of a recession like the inverted yield curve, it's not a surprise to see investors jittery on signs of a drop in consumer spending. However, I still think it's too early to say with any certainty that a recession is coming.
Banks are generally well positioned to benefit from better earnings this year, an improving regulatory environment, and more mergers and acquisitions. However, while I don't think they are bad stocks to buy, JPMorgan Chase, Goldman Sachs, and Morgan Stanley trade at historically high valuations right now. That doesn't mean they won't continue to move higher, but I think investors can likely find more attractive bank stocks in the small- to mid-cap space. These generally trade cheaper and will likely see more M&A activity.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, JPMorgan Chase, and Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
