What happened
Shares of several banks and financial stocks fell today, as investors brace for a recession that is looking more and more like a possibility considering the rising price of oil and high levels of inflation.
Shares of Bank of America (NYSE: BAC) had fallen nearly 5.7% as of 2:57 p.m. ET today, while shares of Wells Fargo (NYSE: WFC) and PayPal Holdings (NASDAQ: PYPL) traded roughly 5.4% lower.
So what
Prior to Russia's invasion of Ukraine, inflation had already been growing at a fast pace and many analysts and investors expected the Federal Reserve to raise its benchmark overnight lending rate, the federal funds rate, multiple times this year to combat that inflation.
But these concerns have now intensified with President Joe Biden mulling a ban on oil imported from Russia, the world's third-largest producer. The news sent the price of a barrel of U.S. crude oil to roughly $130 Sunday night before it settled back down some.
Image source: Getty Images.
The rise in U.S. oil prices is the highest level seen since the global recession in 2008. On Sunday, the national average for a gallon of gas in the U.S. surpassed $4, within reach of the July 2008 high of $4.11.
"The rule of thumb I learned from auto industry economics in the 1990s is that if oil prices go up 100% in a one-year period, expect a recession," said Nicholas Colas, co-founder of DataTrek Research, according to CNBC.
On Thursday, the U.S. Bureau of Labor Statistics will release February data for the Consumer Price Index (CPI), which measures price increases for a basket of daily consumer goods and services. Investors believe the CPI could show a nearly 8% year-over-year rise.
Some inflation can actually be good for financial companies, but too much may hurt banks like Bank of America and Wells Fargo because it could slow demand and make borrowers less likely to pay back their loans. Bank of America and Wells Fargo are the two largest commercial lenders in the country, so a recession or further economic uncertainty may stop businesses from investing further in their operations or taking on too much debt.
PayPal is more in the payments space but depends on consumer and merchant demand as well. All three of these companies will also suffer if global demand is impacted by the conflict between Russia and Ukraine.
Now what
It's certainly tough to feel positive amid all of the headlines regarding Russia and Ukraine, as well as all of the economic headlines regarding inflation and the price of oil. But I am not entirely sold that we will see a recession.
The U.S. consumer is still in relatively strong financial shape, and the jobs market is still quite robust. In February, the U.S. added 678,000 jobs and the unemployment rate fell to 3.8%. Additionally, wages have been rising this past year as well -- albeit not as fast as the CPI -- but still incredibly strongly when you look back historically.
A recent survey taken by CNBC showed that, on average, the 14 economists polled expect gross domestic product in the U.S. to rise 3.2% this year. That number has been on the decline but is still higher than normal GDP growth in the U.S. I'm certainly concerned about what's going on, but still don't see a recession as a guarantee to happen. If we can glean signs that there is not going to be a recession, I would expect stocks like Bank of America, Wells Fargo, and PayPal to bounce back very quickly.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns and recommends PayPal Holdings. The Motley Fool has a disclosure policy.
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