What’s happened
Shares of several banks and financial companies fell today as investors brace for a recession that looks more and more likely given rising oil prices and high inflation.
Stock Bank of America (BAC -6.37%) fell nearly 5.7% as of 2:57 pm ET today, while shares Wells Fargo Co. (WFC -6.11%) and PayPal Holdings (PYPL -6.31%) is trading down about 5.4%.
So what
Prior to Russia’s invasion of Ukraine, inflation was already rising at a rapid pace, and many analysts and investors expected the Federal Reserve to raise its base overnight lending rate, the federal funds rate, several times this year to fight inflation.
But now those fears have been heightened as President Joe Biden is considering a ban on oil imports from Russia, the world’s third-biggest oil producer. The news sent the price of a barrel of US crude oil up to around $130 on Sunday evening before easing slightly.
Image Source: Getty Images.
The rise in US oil prices is the highest level seen since the 2008 global recession. On Sunday, the national average per gallon of gas in the US topped $4, coming close to the July 2008 high of $4.11.
“A rule of thumb that I learned from auto economics in the 1990s is that if oil prices rise 100% in one year, expect a recession,” said Nicholas Colas, co-founder of DataTrek Research, according to CNBC.
On Thursday, the US Bureau of Labor Statistics will publish February data on the consumer price index (CPI), which measures the rise in prices for a basket of everyday consumer goods and services. Investors believe that the consumer price index could show growth of almost 8% year on year.
Some inflation can actually be good for financial firms, but too much inflation can hurt banks like Bank of America and Wells Fargo because it can dampen demand and make it less likely that borrowers will repay their loans. Bank of America and Wells Fargo are the country’s two largest commercial lenders, so a recession or further economic uncertainty could prevent businesses from investing more in their operations or taking on too much debt.
PayPal operates more in the payments industry, but also depends on the demand of consumers and merchants. All three companies will also suffer if the conflict between Russia and Ukraine affects global demand.
What now
Of course, it’s hard to feel positive amid all the headlines about Russia and Ukraine, and all the economic headlines about inflation and oil prices. But I’m not entirely sure we’ll see a recession.
The US consumer is still in relatively strong financial shape and the labor market is still fairly stable. In February, 678,000 jobs appeared in the US, and the unemployment rate fell to 3.8%. In addition, wages also rose last year, although not as fast as the consumer price index, but still incredibly strong in hindsight.
A recent poll by CNBC found that an average of 14 economists polled expect US gross domestic product to grow 3.2% this year. This number is declining, but still higher than normal US GDP growth. I am, of course, concerned about what is happening, but still I do not consider a recession a guarantee of an offensive. If we can find signs that there won’t be a recession, I expect stocks like Bank of America, Wells Fargo and PayPal to bounce back very quickly.
This article represents the opinion of the author, who may disagree with the “official” recommender position of premium consulting service Motley Fool. We are colorful! Questioning an investment thesis—even our own—helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.