The stock market was large on Monday. From 15:10 EDT, the industrial average of Dow Jones had fallen by 2.6% and it was on pace for the worst day of the year, and the S&P 500 Did it get worse, decrease by 3.4%. Even worse, the technically heavy Nasdaq fell by almost 5% and would post his worst decrease since September 2022.
Bank shares did even worse than these important benchmarks. And it was not only large banks: in the industry of financial services, shares adopted a big hit. To name a few examples, Megabank Citigroup (NYSE: C) had fallen by around 6%; Investment banking giant Morgan Stanley (NYSE: MS) was lower with 8%; and online bank disorder Sofi (Nasdaq: Sofi) Immersed by around 12%.
Certainly, although today’s movements look scary, they are only the last in a long -term sale that has taken place in recent weeks. Citigroup and Goldman Sachs have both fallen by around 22% since their highs in the middle of the February 2025. Sofi has fallen by around 38% since reporting income at the end of January.
The short explanation is that recession fears and other economic headwind ensure that investors lose confidence in bank shares.
Between the many reductions of government employees, uncertain rate policy and recent weaker than expected economic data, the chance of an American recession has increased sharply.
In fact, the Federal Reserve Bank of Atlanta now predicts that GDP will contract with an annual rate of 2.4% in the first quarter, which would be the worst economic growth, because the COVID-19 Pandemie almost closed the American economy in the second quarter of 2020.
Recessions are generally bad for banks for a few different reasons. It is clear that they can ensure that the consumer’s demand to drop loans. But they can also make the standard rates of loans higher to be higher, especially when it comes to personal loans and credit cards, both uncovered forms of debts, which are focus areas of Sofi and Citi respectively.
Certainly, there are some potential positive effects, such as lower interest rates that usually come with poor economic conditions. This can help reduce the deposit costs of banks and to stimulate some types of credit activities (for example, mortgage reefinance). But let’s be completely clear: in a recession the bad would almost certainly outweigh the good for the banking sector.
On the investment banking side, although trade yields usually do well in turbulent market environments, poor economic conditions also tend to lead to less merger and acquisition (M&A) activity, fewer initial public offers (IPOs) and less appetite of companies for new debts.
