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Recession-Minded Bank Activity Sends Stocks Plunging

New earnings reports showing banks hunkering down in preparation for a recession due to the Covid-19 pandemic sent markets plummeting on Wednesday.

MANHATTAN (CN) — Nervous Wall Street traders began early sell-off Wednesday, as additional earnings reports showed financial institutions 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 sell-off was likely triggered by earnings reports from leading financial institutions, showing 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

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. Some, like Nordstrom, have warned that a prolonged shutdown of physical stores would cause the companies to become financially distressed. 

One of the few bright spots in a darkening earnings period, Goldman Sachs 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.

Much of Goldman’s income has come from Wall Street rather than consumer banking, with its investment banking segment pulling in $2.18 billion in net revenues during Q1 2020, a $438 million increase over revenue reported during the last period in 2019.

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. 

“As policy measures to stem the pandemic take root, I am confident our firm will emerge well-positioned to help our clients and communities recover,” CEO David Solomon said in a statement.

Bank of America also released its earnings before the market opened Tuesday, showing $4 billion in net revenue for the first quarter. Compared with $7.3 billion in net revenue during the same period last year, the bank showed a 45% decrease in earnings year over year.

Similar to other financial institutions, much of the losses are due to capital reserves set aside — in Bank of America’s case, $3.6 billion — preparation for a deep recession.

“Despite increasing our loan loss reserves, we earned $4 billion this quarter, maintained a significant buffer against our most stringent capital requirement, and ended the quarter with more liquidity than when we began,” CEO Brian Moynihan said in a statement.

Citigroup also a major decrease in net revenue, posting $2.52 billion for 2020’s first quarter 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.”

Earlier this week other banks released their earnings. On Tuesday, JPMorgan Chase reported its 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. 

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.

In the health care realm, insurer UnitedHealth Group posted slightly higher revenues from a year ago, with $64.4 billion in the first quarter of 2020 versus $60.3 billion in the first quarter of 2019.

UnitedHealth Group President Andrew Witty announced today he will take a leave of absence to help the World Health Organization’s Covid-19 vaccine development initiative.

Markets abroad slumped ahead of the earnings releases, as well. In Asia, most markets closed slightly down, with only South Korea’s Kospi rising as it posted an increase of 1.72%. Markets in Europe slipped even further, dropping more than 2% in almost all cases by 8:30 a.m. EST.

Oil prices have continued to drop, as well, despite a landmark agreement between OPEC and its allies earlier this week to cut production. 

Leading U.S. oil companies met on Tuesday to strategize a plan on how to cut production and survive as social-distancing guidelines have stymied global demand for oil.

During the marathon meeting, Pioneer CEO Scott Sheffield asked Texas oil regulators to adopt a statewide production cut of 1 million barrels per day to stabilize plummeting prices to about $30 per barrel.

“We need $30 to survive,” he said. “$30 is what I call we’re crippled, but at least the industry will survive.”

As of Wednesday morning, oil on the West Texas Intermediate had dropped below $20 per barrel. The International Energy Agency said Wednesday it expects a daily demand decrease of 9.3 million barrels a day in what has become the worst year so far for global oil markets.

While oil and equities both slump, gold — a bastion for frightened investors — rose to nearly $1,750 per ounce Wednesday morning, its highest since 2012. The mini-rally on gold might be due to unprecedented moves by the Federal Reserve to keep markets liquid, which has also devalued the U.S. dollar. 

Nearly 2 million have contracted coronavirus worldwide, while 127,000 have died, according to data compiled by researchers at Johns Hopkins University. In the United States, 609,000 have been confirmed to have the virus, and more than 26,000 have died. 

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