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Here's Why Wells Fargo and Other Bank Stocks Soared Wednesday

What happened

The stock market continued its rally on Wednesday, with the Dow Jones Industrial Average up by 2.2% and the S&P 500 higher by 1.5% at the close. This is a continuation of the recent market rally, with the S&P 500 up by more than 7% over the past two weeks and closing over the key psychological 3,000 level for the first time since early March. In fact, the benchmark index is now just 10% lower than its all-time high set in February.

While the stock market's rally has certainly been impressive, the financial sector has performed exceptionally well. The Financial Select Sector SPDR ETF (NYSEMKT: XLF) is up by 16% over the past two weeks, and by more than 4% on Wednesday alone.

The big U.S. bank stocks did even better. Citigroup (NYSE: C) led the way, up by more than 8.4%, while Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and Goldman Sachs (NYSE: GS) were all up more than 6% on the day.

The economy could be making a quicker comeback than experts think. Image source: Getty Images.

So what

The reopening of the U.S. economy is a strong positive catalyst for the banking industry. And when it comes to reopening, we've had quite a bit of positive news lately.

For example, just today we heard from Mayor Bill de Blasio that New York City is looking at how to reopen bars and restaurants and is on track for phase one of reopening in early June. Separately, Dr. Anthony Fauci, a White House health adviser, said that a second wave of COVID-19 infections can potentially be avoided if states reopen "correctly."

Housing data and consumer confidence data have both been far better than expected. And in financial sector news, Bank of America CEO Brian Moynihan said at a conference that requests for loan forbearance and deferrals have slowed down.

The recent news has generally pointed to a quicker and smoother reopening of the economy than many had previously thought. This could mean that jobs could start coming back quicker, and consumers won't run into as much trouble paying their bills, which would be excellent news for these banks, all of which had set aside billions to cover anticipated loan losses.

Now what

It's also worth pointing out that although the bank stocks were the best-performing part of the market in today's rally, they were also one of the hardest-hit by the pandemic. Even after the recent gains, the financial sector is down by 23% in 2020, compared with just 7% for the S&P 500.

The bottom line is that a prolonged shutdown and recession would be bad news for banks, which is why we initially saw their stocks plunge when the coronavirus pandemic worsened in March and April. However, it's starting to look like we're turning a corner and slowly but surely getting back to business, and quicker than many had expected. That's likely to help banks avoid massive losses and get back to lending sooner rather than later, and that's why we're seeing bank stocks rise.

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Matthew Frankel, CFP owns shares of Bank of America and Goldman Sachs. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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