MANHATTAN (CN) — Investors ditched stocks on Wednesday after leading financial institutions announced they were bracing for a coming recession.
Shortly after the morning bell, the Dow Jones Industrial Average fell more than 500 points, giving up much of the week’s gains. The Dow fell almost 2% to close at 23,506 points, while the S&P 500 and Nasdaq had similar losses.
Wednesday’s sell-off began early when earnings reports showed banks stashing billions of dollars to prepare for a coming recession, as well as a report by the U.S. Census Bureau showing a record drop in retail last month.
In earnings reports today, leading banks revealed they had set aside nearly $20 billion to prepare for a coming recession.
“My guess is they are trying to be very conservative now but know they will put more money down later,” said J.B. Kurish, a finance professor at the Goizueta Business School at Emory University. “They don’t want to respond with a much bigger number down the road, because then it looks to investors like they didn’t read the tea leaves correctly.”
Leading the pack was Bank of America, which announced it was setting aside $3.6 billion in capital reserves. The bank reported $4 billion in net revenue for the first quarter for 2020, compared with $7.3 billion during the same period last year, a 45% decrease in earnings year over year.
Other banks also are preparing for the worst. Citigroup posted a nearly $5 billion in loan-loss reserves, as well as a major decrease in net revenue. During 2020’s first quarter, the bank reaped $2.52 billion in profits, compared with $4.71 billion during last year’s first quarter, a 46% decrease.
“Covid-19 is a public health crisis with severe economic ramifications,” Citi CEO Michael Corbat said in a statement. “While no one knows the severity or longevity of the virus’ impact on the global economy, we have the resources we need to serve our clients without jeopardizing our safety and soundness.”
Faring better than competitors due to its heavy involvement in trades rather than consumer banking, Goldman Sachs also set aside some cash.
In its report, Goldman Sachs reported about $713 million in capital reserves. The bank reported $8.74 billion in net revenues during the first quarter of 2020, only slightly less than net revenues during last year’s first quarter. Its asset-management division lost $96 million, however — an alarming contrast to the nearly $1.8 billion it made in the first quarter last year.
Earlier this week other banks released their earnings and indicated preparation for a recession.
JPMorgan Chase, whose first-quarter income fell more than two-thirds year over year, from $9.1 billion in the early part of 2019 to $2.8 billion during the first quarter of 2020, has set aside nearly $7 billion in reserves.
Wells Fargo also saw a major dip in net income, with $653 million during the first quarter of 2020 compared with $5.9 billion during first quarter of 2019. The bank has set aside about $3 billion in reserves.
Some investors and market analysts have stopped using the recession of 2008 as a reference point and are turning instead to the Great Depression and recessions from a century ago.
“It has all the earmarks of a short recession,” Lewis Spellman, a finance professor at the University of Texas at Austin, told Courthouse News, noting that during the tech and housing bubbles of 2000 and 2008, there was excess inventory at the end. “We don’t have that problem.”
Spellman found this downturn more like the agricultural boom and bust of 1920, in which producers will need to go back to work. “The only thing that will slow it down is if firms have bankruptcies,” he said.
The recovery also likely will hinge on consumer spending. “Looking at retail, manufacturing, industrial — everything is down so much,” Kurish said, noting that many consumers may have a newfound reticence for spending when businesses reopen.
“None of us wanted to get on a plane on Sept. 12,” he said.
Consumer spending is already at historic lows. According to Wednesday’s census report, sales fell 8.7% in March, their largest drop since the government began tracking those services in 1992, according to the report.
Food and beverage sales — spurred by consumers’ rush to grocery and big-box stores to pick up supplies as they hunkered down at home — increased 28% from March 2019. But other industries such as clothing saw their sales decrease by as much as 25% or 50%.
Many retailers have already laid off or furloughed hundreds of thousands of workers. Nordstrom has warned a prolonged shutdown of physical stores would cause the companies to become financially distressed, while J.C. Penney said it is considering filing for bankruptcy.
More than 2 million have contracted coronavirus worldwide, while 132,000 have died, according to data compiled by researchers at Johns Hopkins University. In the United States, 613,000 have been confirmed to have the virus, and more than 27,000 have died.