Insights

Why Shares of Citigroup, JPMorgan Chase, and Goldman Sachs Are Falling Today

What happened

Shares of several major bank stocks took a hit today after new data showed that inflation is still surging and may not have peaked yet. The Dow Jones Industrial Average had lost more than 650 points as of this writing while the Nasdaq Composite was down close to 3%.

Shares of Citigroup (NYSE: C) traded 4.3% lower as of 2:25 p.m. ET today, shares of JPMorgan Chase (NYSE: JPM) were 4.2% lower, and shares of Goldman Sachs (NYSE: GS) were down 4.8%.

So what

The U.S. Bureau of Labor Statistics released data for the month of May for its closely watched consumer price index (CPI), which tracks the prices of daily goods and services and is one gauge of inflation that investors monitor. The CPI in May rose 8.6% on a year-over-year basis, while economists had only expected an 8.3% increase.

Image source: Getty Images.

Many investors had thought that inflation might be peaking in May after the CPI only rose 8.3% on a year-over-year basis in April. With inflation still high, that makes the Federal Reserve’s job of taming inflation without tipping the economy into a recession much more difficult. The Fed is already aggressively raising its benchmark overnight lending rate and has begun the process of reducing its $9 trillion balance sheet.

Sung Won Sohn, a professor at Loyola Marymount University in Los Angeles, was quoted by Reuters as saying: “The Fed now recognizes that it is way behind the curve on inflation and must act more decisively. Stagflation is the most likely scenario for the next couple of years, with the probability of a recession rising.”

While most banks are expected to benefit from rising interest rates, too much inflation can be a drag on consumer and business activity and demand. It can also hurt the finances of consumers and businesses and lead to more loan losses.

Now what

While I could see the U.S. economy tipping into a recession, right now I am not of the belief that it would be a severe recession, considering the current strength of the U.S. consumer and job market — although there could certainly be some upcoming deterioration in those two areas.

But at this point, I definitely like all three of these stocks after the recent sell-off in the banking sector this year.

JPMorgan Chase is the largest bank in the U.S. Not only is the bank expected to benefit from the most prominent rising interest rate environment seen since the Great Recession, but it also now has a very strong trading business that has likely been booming due to all of this market volatility. The bank and its CEO Jamie Dimon are battle-tested and have survived and done well in multiple recessions.

Trading at less than eight times earnings, I also find Goldman Sachs to be an attractive pick right now. Not only will its trading business benefit nicely from the volatility, but the bank has been successfully building out its consumer banking business to create more durable and consistent earnings.

Finally, Citigroup trades at the largest discount to its tangible book value, or net worth, of any large U.S. bank stock. The company has struggled for years but finally looks to have a clear transformation in place. The bank also got a huge endorsement when Warren Buffett and Berkshire Hathaway invested in the stock this year. While the transformation won’t happen overnight, I think the bank is on the right track.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $90 calls on Citigroup. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Goldman Sachs. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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