What happened
The stock market continued its recent rally on Wednesday, with the Dow Jones Industrial Average and S&P 500 index up by 1.2% and 1%, respectively, at 10:45 a.m. EDT.
One of the day's standouts is the financial sector. The Financial Select Sector ETF (XLF 0.35%) was higher by 3.4% on the day, and the big banks are leading the charge. Wells Fargo (WFC 2.73%), JPMorgan Chase (JPM 0.65%), and Citigroup (C 0.26%) were all up by approximately 5%.
Image source: Getty Images.
So what
In a nutshell, investors are becoming more and more optimistic about the reopening of the economy. Data shows that consumers might be more willing to spend than many had originally thought, and that economic activity is rebounding fairly quickly.
On Wednesday, we learned that private payrolls fell by 2.76 million in May, but this was far less than the 8.75 million contraction that was expected. And, the ISM non-manufacturing index, which shows how well the service sector is performing, rebounded more sharply than expected from the 11-year low reported in April.
On the payments front, Visa (V -0.48%) recently reported that U.S. payment volume was only down by 5% year over year in May, which is a dramatic improvement from the 18% decline seen in April.
And finally, the COVID-19 case numbers continue to move in the right direction. As state economies have all started to reopen (with some in the advanced stages of reopening), there has been fear of a spike in case numbers, which simply hasn't happened. In fact, according to the latest data from Johns Hopkins, the five-day moving average of new case numbers in the U.S. continues to trend lower.
As would be expected when reopening data has been positive, the stocks that have been hit the hardest by the pandemic are seeing the largest upward moves. And the financial sector has definitely not been one of the market's bright spots for most of 2020. After the recent market rally, the S&P 500 is only down by about 4% from where it started the year, but the financial sector is down by 20%.
Bank stocks that have large consumer lending operations, especially when it comes to riskier loans like credit cards and commercial loans to the oil and gas industry, have done especially poorly. Even after today's move, JPMorgan Chase and Citigroup are still lower by 25% and 33% for the year, respectively. Wells Fargo has been the laggard of the big banks, down 46% year-to-date. Unlike the others discussed here, Wells doesn't have a major investment banking business (which tends to do quite well in turbulent markets).
Now what
Most big banks (including the three discussed here) have set aside billions in anticipation of elevated default rates and loan losses as a result of the economic impacts of the COVID-19 pandemic. As the economic reopening news continues to be strong, it gets increasingly likely that banks will avoid massive loan losses and will see consumer demand pick up sooner rather than later.
