Major banks set aside $4 billion for the recession. Investors are more bullish: morning briefing

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Saturday, January 14, 2022

Today’s newsletter by Miles Oddland, Head of News at Yahoo Finance. Follow him on Twitter @employee and on linkedin. Read this and more market news on the go Yahoo finance app.

Major banks including JPMorgan, Wells Fargo, Citigroup and Bank of America reported quarterly results on Friday.

Combined, these companies have sent a clear message to investors – we are preparing for a downturn.

As a group, these banks have set aside more than $4 billion in loan loss provisions, or money they expect not to be repaid by borrowers.

JPMorgan (JPM) made $1.85 billion in provisions for credit losses, saying those reserves were built because the company’s outlook “now reflects a mild recession in the central state.”

For its part, Bank of America (BAC) set aside $1.1 billion for credit losses in the fourth quarter, Wells Fargo (WFC) $936 million, and Citigroup (C) another $640 million.

At first, investors saw these reserves as a negative signal for banks and the economy in general. Futures fell early on Friday, as did the shares of every bank.

By the time the closing bell rang on Friday, each company’s stock was higher along with the broader market.

Investor reaction corresponds to early trading in 2023.

It may indicate a more constructive background in the coming months.

Jamie Dimon, President and CEO of JPMorgan Chase & Co., attends a US House of Representatives Financial Services Committee hearing titled “Big Banks Accountable: Oversight of America’s Largest Consumer-Facing Banks” on Capitol Hill in Washington, US, on September 21 2022. REUTERS/Elisabeth Frantz

In a note to clients earlier this week, Fundstrat’s Tom Lee noted that market history says the S&P 500’s rally in the first few days of the year — the period that ended last Tuesday — is unequivocally positive.

Citing the “first five days” rule, Lee notes that in seven previous instances where the S&P 500 rose 1.4% or more in the first five trading days of the year After, after A losing year, the index has posted an annual gain each time – an average gain of 26%.

In other words, the “base” case for 2023 is [the] Lee wrote that the S&P 500 could gain more than 25%, which is completely against the consensus that sees [the S&P 500] It fell to 3,000 in the first half of 2023, before recovering to become flat. In short, 2023 is expected to see much stronger returns than many expect.”

Now, the rebound in the stock market after traders endured the most challenging environment in a generation should come as only little surprise. The stock market may not mean a comeback, but stocks tend to go up over time.

Moreover, investors tend not to react to what is happening but rather to what they think will happen.

Apply that logic to the case of bank stocks on Friday, and market action suggests that investors fear worse news. If some investors think this is a “bad news is bad news” type of market, then it seems that the opposite is also true – good news was good news on Friday.

Looking away from the financial giants and toward more speculative pockets of the market, risky energy is certainly seeping beneath the surface.

Frantic rises in one-time meme stocks like Bed Bath & Beyond (BBBY) and Carvana (CVNA) this week — and to a lesser extent names like Coinbase (COIN) and Cathie Wood’s flagship ARK Innovation ETF (ARKK) — suggest some investors have You entered 2023 with a “new year, new you” mentality after 2022 is almost here.

And whether or not you consider yourself a market historian, anyone who pays close attention to daily price action in early 2023 can see things look very different from the way we ended last year.

Now, the difficulty in noticing stocks rising over time is that these steady gains are driven by steadily rising corporate earnings. And many on Wall Street still don’t think investors are conservative enough in this year’s earnings drop model.

But if stock prices tell us what investors think about the future, corporate earnings tell us what we know about the past.

In the fourth quarter of 2021, JPMorgan, Bank of America, and Citigroup, for example released Reserves set aside for credit losses amid a booming economy and healthy consumer balance sheets. The following year, inflation rose to a 40-year high, and an imminent recession became the consensus view on Wall Street and Main Street.

Against this recent history, then, the market’s reaction on Friday serves as a reminder for investors who have already braced for this bad news from banks. That’s what all the fuss was about last year.

And that’s what all the optimism is about so far this year.

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