Investors on Bank Stocks: Unsettled Future Ahead
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Your Money Briefing.
Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. The big bank stocks kicked off the week with a strong performance, but investors still see clouds on the horizon. We'll explain why that could be a bad idea in a moment. First, these money headlines. Retail sales were solid in June, rising 0.5% from a month earlier.
How did retail sales and consumer spending shape the economic backdrop for banks?
And more important, May's gain was revised to a strong 1.3 percent from 0.8 percent, with nearly every category of spending higher. The data added to evidence the economy is growing rapidly. The strong sales report encouraged economists at Barclays to push their estimate of second quarter gross domestic product growth from 5 percent to 5.2 percent. But the numbers also raised the question, where are Americans getting the money they're spending? The personal spending rate was previously reported at 3.2% in May versus 3.8% a year earlier, and it seems likely it'll be revised even lower. Even as they save less, people are borrowing more. And a report from the Sun Life Company indicates the number of patients whose medical care costs at least a million dollars over the course of a year
The report cites expensive injectable drugs, especially for rare diseases, as one factor contributing to the rise. Those drugs, including those administered both intravenously and self-administered, made up 6.6% of aggregate claims for patients with million-dollar-plus health care costs, or $61.5 million of $935 million total. Among the top 20 drugs prescribed to patients with million-dollar or more health costs, the largest share was for blood disorders, followed by cancer drugs. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. Monday was an upbeat day for many of the big bank stocks, but that positive performance comes on the heels of a hefty dose of skepticism on the part of investors who aren't exactly seeing clear skies ahead.
And Herd on the Street columnist Aaron Back is here to discuss. So, Aaron, the big bank stocks had a tough first half of the year. Investors have a wary eye on the future.
Yeah, that's absolutely right. A number of bank stocks are up about 2% on Monday due to some fairly positive Bank of America earnings. But overall, they're still down about 15% from their high in January. And that's because investors are worried that a turn in the economic cycle may be coming in the future.
You point out in your column, the pessimism investors have for the sector beyond the horizon could be misplaced.
Yeah, well, I mean, no one knows what the future holds. But the results that we've seen from JP Morgan, Citigroup, Bank of America so far for the second quarter have all been extremely positive. We're seeing big increases in pre-tax profits. We're seeing higher net interest margins. Banks are earning more on their loans. We're seeing robust trading activity. So no one knows what's around the quarter. But if you just look at the evidence in front of us today, These banks are doing very well.
But economic data shouldn't be ignored. The yield curve, which you point out in your story, in your column, where we see short-term interest rates rising while long-term rates stay low, typically means we're on a path to recession. That's rarely wrong.
What tends to be a strong indicator of a recession is when the yield curve inverts, i.e. when short-term rates go higher than long-term rates. It's unusual, but it's something we saw, for example, before the financial crisis. That hasn't happened yet. So far, we've just seen the yield curve flatten, meaning short-term rates are rising, but not quite at the level of long-term rates yet. And conventional wisdom is that's very bad for banks. But Bank of America and Citigroup both said on their conference calls the last few days, Monday and Friday, that that actually that's overrated. It doesn't mean that their results are bad. And in fact, they benefit from higher short-term rates because most of their loans are tied to short-term rates.
Things like people's credit card loans are tied to overnight interest rates.
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