There is a conception among investors that in a high-interest rates environment, Banks Stock are good picks as they collect more interests on loans and mortgages. In my opinion, not only this is just wishful thinking but the Banks are set for more pain as the Fed hikes interest rates and the fear of recession becomes real.
First, 2020 and 2021 were blockbuster years for the Banks as cheap money pumped by the Fed into financial markets fueled a bonanza in company-financing activity. The pace of dealmaking and initial public offerings (IPOs) as well the private fundraising and the mortgage skyrocketing demands led to records profits. For the instance, Goldman Sachs made $22bn from trading in 2021 alone, the most since 2008. another example is Global IPOs raised the mammoth sum of $600bn in the capital in 2021, compared with around $200bn in 2019.
But this year the IPO market is hibernating facing challenges rising inflation and interest rates, slowing economic growth, and geopolitical tensions. In addition to mortgages and loans, customer demand is likely to slow down as people fear recession and enter saving mode, add to that the fact two-thirds of American live paycheck to paycheck. Raising rates means less spending and in the worse case not being able to pay their loans.
Second, the raising of wages bills and compensation costs due to inflation. Last Year the banks saw a big jump year on year in cost. Compensation costs at Goldman in 2021 jumped by 33%, compared to last year, to $17.7bn, an increase of $4.4bn. Citi's wage bill spiked by 33%. But now, amid of the economic slowdown, The banks have to start layoff. as one of the Wall Street recruiter said:
"When the banks have a revenue problem, they're left with one way to respond. That's by ripping out costs."
JPMorgan already started to lay off hundreds of employees in the mortgage division as result.
Third, As the six of America’s largest banks—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo—preparing to report earnings for the third quarter of 2022 between July 14th and 19th, I think we are heading for more down.
Let's go to the charts and do some analysis:
Goldman ($GS) is in a downtrend. level of 279-280 is a critical support for bulls. if it breaks, I would look for 266 and 249.67 as the stock may quickly drop due to a volume gap.
JPMorgan ($JPM) is already below its pre-pandemic level, but still facing more downside. Once level 110 breaks, I will look for 105 and then 98.84 as there is a big volume gap there.
Trade carefully and watch levels.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision. The views, thoughts, and opinions expressed here are the author’s alone.