EarningsBeats.com Digest for March 14, 2022
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Rising Rates Are Not Always Good News For Banks
The Federal Reserve is about to embark on a rate-raising campaign to fight inflation. For the first time since 2018, the Fed is widely expected to raise its short-term fed funds rate on Wednesday of this week. We normally think of rising rates as a benefit to banks, but we need to keep in mind that if only short-term rates are rising, it
actually squeezes the net interest margin of banks, significantly reducing their profitability. The long-term end of the yield curve must also be moving higher for banks. It's moving somewhat higher currently, but not at the rate necessary to offset the anticipated fed funds rate hikes. This can be particularly problematic when the economy slows, which I believe it's already begun to do. A slowing economy usually results in long-term yields falling. A bank like JP
Morgan Chase (JPM) could be vulnerable. Here's a current look at JPM's technical behavior:
In the year leading up to the 1990 Persian Gulf War and subsequent recession, JPM lost more than a third of its market capitalization. But it then dropped another 50% in the next two months as the recession became entrenched. I'm not looking for that type of drop, but many banks like JPM could be in danger of much more significant falls after an already difficult start to 2022. The Fed's anticipated rate increases will increase banks' borrowing
costs with the Fed and other banks. Meanwhile, a recession will likely put downward pressure on longer-term yields like the 10-year treasury yield ($TNX) in time. Effectively, banks get severely squeezed in terms of their net interest margins. On the chart above, JPM has been a serious underperformer within the banking area and its AD line (accumulation/distribution line) has fallen apart over the past 6-7 months. While anything is possible, I believe the worst is yet to
come for banks like JPM. If you want to own banks, consider those showing relative strength, even though I expect nearly all banks to struggle with an impending recession looming.
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Tom Bowley
Chief Market Strategist
EarningsBeats.com
Better Timing. Better Trades.
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