Here's what's bringing those stocks down and why consumer sentiment is at a five-year high:
- Banks slide amid record earnings- JPMorgan and Wells Fargo each reported record quarterly profits but neither stock is surging on the results. Wells reported third-quarter net income of $4.94 billion, or 88 cents per share, up from $4.06 billion, or 72 cents a year ago and JPMorgan announced third-quarter earnings of 5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share a year earlier. The record results were spurred by homeowners taking advantage of lower interest rates in order to refinance their mortgages. "The one big positive is clearly mortgage origination revenues," Richard Staite, an analyst at Atlantic Equities LLP in London, told Bloomberg News in an interview before results were announced. "Rates will remain at this level or potentially drop further and ultimately that will drive a recovery in the housing market."
Yet, the low interest rates also hurt banks as they earned less money on loans. Wells saw its net interest margin, which indicates profitability on loans, fall more than 4.5% and the company missed analysts' estimates on revenue. JPMorgan's net interest margin fell more than 8.5% but the company did beat revenue forecasts. Another reason for concern is that both companies acknowledged legal worries in their earnings call. Wells was sued by the federal government on Tuesday for misleading regulators about the quality of loans and JPMorgan will face litigation for several issues. Most recently it was sued by the New York attorney general relating to mortgage-backed securities sold by Bear Stearns. On a call with reporters, JPMorgan CEO Jamie Dimon didn't sound too confident that his company's legal troubles would end anytime soon. "Obviously we're in a litigious society," Dimon said. "We have a lot of mortgage suits coming and others. ... Hopefully it will come down over time but we can't promise you that." WFC stock is down 3.5% in early trading and JPM stock is down 1.3%. Editors Note: If banks seem too risky for you then check out these six solid dividend stocks.
- Consumer sentiment rises to pre-recession highs- Consumer confidence, measured by the Thomson Reuters/University of Michigan sentiment index, unexpectedly increased to its highest level in five years. The preliminary October reading rose to 83.1 from 78.3 last month. Consumers are becoming more confident about the economy following last week's drop in unemployment and with housing prices on the rise. Consumers are also feeling better about what's ahead as the gauge of consumer expectations six months from now, which is a better indicator of where consumer spending is headed, increased to 79.5 from 73.5 in September. "It's a combination of rising home prices and higher equities," Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York told Bloomberg. "Consumers have, all things considered, been spending reasonably well."
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