Financial sector-related exchange traded funds retreated Thursday as Big Banks reported earnings and warned of the potential trouble ahead with the growing risk of a recession.
The Financial Select Sector SPDR (XLF) declined 2.5% on Thursday.
JPMorgan’s Jamie Dimon warned that the environment is like a coming “storm” as Wall Street banks prepped for the economic headwinds ahead and reduced risk exposure in certain areas, Reuters reported.
Banks are trying to stay afloat in an environment of surging inflation weighing on consumer sentiment, weakened markets that have pressured investment banking, and an inverted U.S. Treasury yield curve further adding to income troubles.
“The environment — if I had to use one word to describe it, it would be complicated,” Morgan Stanley Chief Executive James Gorman told Reuters, citing the conflict in Ukraine, interest rate increases, economic threats, and other factors.
“I think it’s important to say, though, it is not 2008 complicated. This is a different type of financial stress in the system. And frankly, the banking sector is much stronger than it was going into the last time.”
JPMorgan’s Dimon also revealed that the bank had been “managing certain exposures” such as diminishing its bridge loan positions and avoiding subprime lending. “We’re quite careful about how we run the risk of the company… It’s just going to go through a storm.”
Morgan Stanley’s Gorman also mirrored this more conservative sentiment, adding that his team in fixed income and equities have been “prudent” compared to their competitors.
Inflation remains a major concern. Bank of America Institute senior economist David Tinsley warned that as inflation pushes the price of gas and groceries higher, customer spending will largely be locked up to those categories, particularly among lower-income Americans.
“This very high level of U.S. inflation is eroding real spending power,” Tinsley told Reuters. Still, Bank of America’s customer data shows, “There is quite a lot of cushion left.”
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