After getting off to a strong start, fears spiked about Wall Street returning those gains amid financial sector struggles. Notably, the benchmark exchange-traded fund SPDR S&P Bank ETF (NYSEARCA:KBE) fell about 4% for the year, sparked by a 6% decline this afternoon. Not surprisingly, one search query in the broader business ecosystem dominated most other concerns: Why are bank stocks down today?
Fundamentally, the financial sector faces myriad challenges. At the top of the order stands geopolitical tensions. Obviously, the military conflict in Eastern Europe threatens to destabilize international order and the supply chain of critical resources. Also, worsening tensions between the U.S. and China threaten to boil over, naturally imposing severe economic risks.
Still, answering the inquiry of why bank stocks are down today represents a convoluted discussion. Notably, CNN reports that the banking sector in Europe performed well. After near-apocalyptic forecasts about an energy crisis in Europe leading to a deep recession not materializing, the region’s banks performed well.
Nevertheless, it’s clear that the U.S. financial industry struggles significantly. Below are three factors to consider.
Why Are Bank Stocks Down Today? It’s Mostly About Risk Exposure.
When inputting the question, why are bank stocks down today, into a search engine, more than likely, two entities will pop up: Signature Bank (NASDAQ:SBNY) and SVB Financial (NASDAQ:SIVB). Down for the afternoon, 8% and 47%, respectively, the losses are simply shocking, particularly for the latter. The culprit comes down to exposure to risk-on assets.
Despite initiating steps to raise cash, SVB Financial stumbled on too much exposure to small companies early in their development. For Signature, exposure to cryptocurrencies — though it has mitigated this risk — weighed on the enterprise.
Signature’s volatility mimics, to a much smaller degree, the woes incurred by Silvergate Capital (NYSE:SI). Unfortunately, Silvergate suffered terrible losses following the collapse of the crypto exchange FTX. Further, the incredible damage that digital assets can cause during down cycles impugns future blockchain-based initiatives.
Rising Borrowing Costs Hurt Business
Another clear headwind contributing to inquiries regarding why bank stocks are down today centers on the benchmark interest rate. Throughout 2022, the Federal Reserve implemented aggressive rate hikes to combat skyrocketing inflation. As the measures appeared to gain traction, the central bank lifted its foot off the accelerator.
Recently, though, better-than-expected economic data translated to stubbornly elevated inflation. To get rising prices firmly under control, Fed Chair Jerome Powell opened the door for more rate hikes at a quicker pace. Powell slightly walked back the hawkish intentions, noting that debate about specific action items remains ongoing.
Still, the overall message is that the Fed needs to control inflation. And that prospect sent a chill to the business community, which lacks incentives to borrow money. In turn, the banking sector risks diminished revenue generation.
The China Conundrum
While many, if not most, regard the President of the United States as the most powerful person in the world, an argument can be made that it’s actually the Fed Chair. True, the president represents the Commander-in-Chief. However, the U.S. is never perpetually in a state of total war. On the other hand, as the world’s reserve currency, the dollar is perpetually in business everywhere.
However, this time around, China may inadvertently become the most potent element regarding monetary policy. With its recent economic reopening, greater commercial activity should translate to considerable resource consumption. This could spike the inflation rate irrespective of what the Fed does, possibly forcing it to raise rates aggressively.
If so, the economy risks slipping into recession. Under this context, it’s no wonder why people want to know: Why are bank stocks down today?
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
