Updated Jan. 15, 2016 7:18 p.m. ET
U.S. recession fears rattled financial stocks anew Friday even as a generally strong bank-earnings season continued, baffling some executives who said they see few signs of worry for the U.S. economy.
The largest victim was Citigroup Inc.,
whose shares slumped 6.4%. The stock posted its worst one-day decline in four years, even after the nation’s fourth-largest bank by assets reported its biggest annual profit in nearly a decade.
On a call with reporters, Citigroup Chief Financial Officer John Gerspach said the New York-based company still expects the U.S. economy to grow about 2.5% in 2016, broadly in line with the views of many economists.
“We feel good about the overall economy,“ Mr. Gerspach said. “Would we like it to be better? Of course we would.”
The disconnect underscores the intense market volatility that has characterized 2016, fueled by growing economic turmoil in China and sharp declines in commodity prices, including a 21% drop in U.S. crude-oil futures this month.
The major U.S. stock indexes are all in correction territory, reflecting declines of 10% or more from recent peaks, and the 10-year U.S. Treasury yield on Friday fell below 2% for the first time in months, pointing to a growing flight-to-safety trade.
On Friday, Morgan Stanley
fell 4.4%, Bank of America
shed 3.5% and Goldman Sachs Group Inc.
lost 3.6%. J.P. Morgan Chase Inc., which rose 1.5% Thursday after posting strong quarterly results, lost 2%.
The KBW Nasdaq Bank Index of large U.S. commercial banks fell 2.9% Friday, greater than the 2.2% fall in the S&P 500. The bank index has lost almost a fifth of its value in the past six months.
“The markets are what the markets are,” Mr. Gerspach said. “I guess the market has to settle with its views toward a variety of issues.”
First among those issues: Whether the market rout of the first two weeks of 2016 spells a sharp slowdown in global growth that will spill over into the U.S. and either throw the domestic economy into recession or, perhaps less acutely, prevent the Federal Reserve from executing a stated plan to raise short-term interest rates as many as four times this year.
Rising rates benefit banks because they make money on the wider spread between the interest charged for loans and the payments made to customers for deposits. Bets on bank stocks have repeatedly tripped up investors because rates have stayed lower for longer than expected and the Fed held off on raising benchmark rates until December.
“Bottom line: We need a better economy, we need loans to grow and we need rates to go higher,” said Jesse Lubarsky, who trades financial stocks at Raymond James. “You can’t invest in [the] group if you can’t invest in an economy going higher and growing.”
Bank stocks have continued to languish despite the Fed’s decision to raise rates in December for the first time in nine years, in part because rates in the market have continued to fall and the global growth outlook has darkened.
Other financial companies have tumbled. Asset managers suffered amid concerns that the decline in stocks, commodities and some bonds will lead to withdrawals by investors. Last year, more than $169 billion left actively managed U.S. stock funds, the largest yearly outflow on record, according to Morningstar Inc.
“You have assets going down, and there’s less assets out there to manage,” Mr. Lubarsky said.
Regional-bank shares also declined. Many of those companies lent heavily to U.S. oil and gas drillers, which have been under pressure amid the collapse in oil prices. For example, Oklahoma lender BOK Financial Corp.
For many investors, the slowdown outside the U.S. is a threat to banks with a global presence, Citigroup included. In a call with Citi executives, analysts focused on the global exposure of the bank, which does business in about 100 countries and gets more than half of its revenue from outside the U.S., making it more dependent on the world economy than its peers.
Jim Tierney, portfolio manager at AllianceBernstein, said the U.S. economy remains on a sound footing and he prefers financial companies with a domestic focus, such as MasterCard Inc.,
which he said is doing a brisk domestic credit-card business. Its shares fell 2.2% Friday.
“The U.S. consumer remains comfortable spending,” Mr. Tierney said. “The U.S. economy isn’t nearly as bad as people think it is.”
Chief Executive Richard Davis said the Minneapolis-based lender’s business wasn’t yet feeling much pressure from the global market turmoil or low oil prices, citing its domestic focus and small energy portfolio. “We’re actually fairly immune from most of those issues at this stage,” he said on a Friday earnings call.
At least one corner of the financial sector was holding up better than the broader market: exchange operators. These companies tend to profit as volatility and trading volumes rise. New York Stock Exchange owner Intercontinental Exchange Inc.
fell 1.9%, while options-exchange owner CBOE Holdings Inc.
eked out a gain of 0.9%.
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