Theoretically, because JPMorgan Chase (NYSE:JPM) is the most powerful among the big four bank stocks – the others being Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) – it should provide a measure of confidence through this unprecedented storm. After all, the entire banking sector learned harsh lessons from the 2008 financial crash. Once society normalizes from the novel coronavirus pandemic, JPM stock should be back, rocking and rolling.
However, shares have traded pensively relative to the strong bounce back seen in other investment sectors. Unprecedented government action designed to address the pandemic’s devastating effects have failed to inspire much momentum in JPM stock. Some might point to the disconnect between benchmark indices and the fundamentals becoming a little bit more connected.
For instance, Federal Reserve Chair Jerome Powell gave a stark warning about the current malaise. To paraphrase his sentiments, Powell believes that additional government support is necessary to overcome this crisis. Still, he’s under no illusions – this will blow a huge hole in our already massive deficit. But the cost will be worth it, in part because the alternative may be even more disastrous.
Not surprisingly, this shift toward a darker tone has capped upside for JPM stock and other big banks. But according to CNBC, senior administrative officials indicated that the White House would likely support a second round of stimulus checks.
Officially, the Trump administration is keeping tight-lipped about this proposal. Nevertheless, I don’t think they have much of a choice. With the President being in a pivotal election year, he must do everything in his power to not only stabilize the economy but to spark tangible momentum.
But will it work?
JPM Stock Caught in a Fiscal Experiment
On the surface, stimulus 2.0 may be just the catalyst JPM stock needs. Yes, the underlying company has bolstered its balance sheet, as has everyone else. Combined with the industry ridding itself of toxic assets, the big banks should be better prepared to handle this crisis.
Unfortunately, I’m skeptical. While I’m not worried about the financial sector sinking itself due to their decision to overleverage themselves, I am worried that the rest of the country will finish the job. As you know, the banks can’t exist for existence’ sake. In order to recover the economy, you must first have economic stability.
That was the well-meaning thesis driving the first coronavirus relief bill. Instead of bailing out just the big institutions, it was time Uncle Sam stepped up and extended a lifeline to the American people. In hindsight, it was probably better for the government to directly support payrolls, incentivizing corporations to keep their employees, similar to what Germany did to handle the Great Recession.
What we’re discovering – perhaps to no one’s surprise – is that American households have consistently socked away their stimulus checks (if they were lucky enough to receive them). That’s great for personal stability. Also, it’s just common sense considering that we don’t know what lies ahead.
But from a broader perspective, it’s absolutely terrible. As you know, consumption drives the U.S. economy. So, what happens when people stop consuming? For the most part, you get a deflationary environment. And that’s exactly what we’re seeing.
Several commodities (gold being a notable exception) are deflated. Retailers have filed for bankruptcy. Outside of essential purchases and tasks, many consumers are choosing to stay home.
In this situation, JPM stock doesn’t have many growth opportunities because very few exist.
While the hoarding of cash naturally imposes deflationary pressures, there is one sector that is experiencing mass inflation: groceries.
According to recent data, grocery costs have jumped the most in this country in 46 years. Although some factors, such as the meat shortage, have exacerbated the supply chain, let’s face it – most of this cost spike is due to demand. With spiking levels of hunger across America, people are simply scared out of their minds.
Whatever funds they have, consumers will use toward food and other essentials. Should we have another round of stimulus, you can be almost sure that the funds will go toward two areas: groceries and savings accounts. Thus, whatever bump JPM stock would receive from the headlines, it wouldn’t align with the fundamentals.
Ultimately, even if JPMorgan is the most resilient of the bunch, I believe the skeptical position is the smart one. Unless the bank wants to enter the agriculture business, there are very few credible growth channels, even with extra stimulus.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.