Why Are Bank Stocks Falling After the Federal Reserve Meeting?

The Federal Reserve decided to hold rates steady and also trimmed its forecast for future rate hikes at its March meeting, and bank stocks have been performing terribly ever since. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what the Fed said and what it means for bank stock investors.

A full transcript follows the video.

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This video was recorded on March 25, 2019.

Jason Moser: OK, at the top of the show, I mentioned last week, the Fed offered some more insight as to how they're viewing the economy, things they're focused on and whatnot. What do investors need to know about the Fed's latest comments?

Matt Frankel: As expected, the Fed didn't change interest rates at all. But they did make some other significant changes, specifically to their future projections. The Fed was previously expecting to raise rates twice this year. My bold prediction was for three times, so I was completely off. I was right on some of my predictions that I made on our New Year's episode, but this is not one of them.

Moser: It was a bold prediction, so we're going to cut you some slack.

Frankel: It was. And technically, it could still happen.

Moser: Yeah, you're right.

Frankel: The Fed now is not expecting to raise rates at all this year and just one time next year. It sounds on the surface like a good thing for investors, but you have to look at the reasons behind it. If you read the language in the Fed statement -- the Fed statement, if you're not familiar, is one of the most dissected and overanalyzed documents in the world. They change a word, and the market could go nuts. This time, that's kind of what happened. They put in there that the growth of economic activity has slowed from its solid rate. That is not what a lot of investors, particularly bank investors, wanted to hear. Bank stocks are down about 10% since the meeting. It's been by far the worst-performing sector of the market.

A couple of reasons. One, yields dropped. Bank profits can tend to go down when yields go down. Banks want higher interest rates in terms of profitability. Not only that, but banks thrive in good economies. When economies are strong, consumers are borrowing money, they're making their payments on time, they have money to put in savings accounts, things like that. When the economy gets weaker, all those revenue streams and revenue drivers for banks tend to suffer. And that's what it seems like the market's anticipating right now.

Just to run through a few of the numbers briefly. The Fed sees inflation a little bit slower than it previously did. It sees unemployment actually ticking up from where it previously saw unemployment. GDP growth, they were projecting 2.3% in 2019. Now, they're projecting 2.1%. Generally speaking, the Fed sees things a little bit weaker than it did before, and it's giving bank investors especially a reason to take a step back and see what the next step is.

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