Banks Play Central Role In Dow Losses


The Dow Jones Industrial Average had no chance this morning. By the time the market opened, news from the other side of the globe had already reached investors and sapped all their confidence from the past two days of trading. As the Street and investors continue to try to forecast changes in the market, any action from another nation's government that might cause unwelcome effects here may cast shadows on trading. So far the damage done to the Dow has been lessened, but the index still trades at a 67-point loss just after 11:15 a.m. EDT.

Central banks become central totrading
It's true that when the Federal Reserve begins to cut back its bond-buying program, there may be some pullback in the overall market. And it's true that as interest rates normalize, the transition period may be a bit volatile. But as the concern over the Fed's next move grows toward obsession, another truth may be emerging: Investors are creating their own self-fulfilling prophecy.

This morning's news is that the Bank of Japan will hold its monetary policy at current levels, despite new volatility in the market. Though some had hoped the central bank would increase the maturities of its government bonds to steady rising yields, the bank held firm. Upon hearing the news, investors in the U.S. grew ever more concerned over our own central bank's reaction to changing markets, leaving little room for gains today. Though equities have benefited from the Fed's monetary policy, and there are sure to be some losses in the future, the worrying about the effect of another country's central bank on the Fed's decisions may make the organic pullback in the U.S. market worse in the end.

Banks still central in feared scenarios
Within the Dow, both Bank of America and JPMorgan are down in trading so far today. Both banks have operations in the Asian markets, so there's some connection to the Japanese concerns weighing the banks down. As we've seen in the past few weeks, weakness from the Asian markets can hit the banks hard. But only 4% and 6%, respectively, of B of A's and JPMorgan's revenues are derived from their operations in Asia. Rival Citigroup, on the other hand, gets up to 20% of its revenue from that market, leading to an investor sell-off this morning -- the bank is down 2.89% as of this writing.

Coupled with the recurring Japanese market issues, investor concern over the Fed's plans has certainly slowed the banks' recent rally, which saw the financial institutions really take off last month. Both Citi and JPM gained as much as 16% during the month, while B of A topped out around 14%. Though investors certainly don't want to lose those gains, speculation and fear may end up hurting them in the end.

As a long-term investor, the current wait-and-see conditions shouldn't be scary to you. Though we know that there will be volatility and transition, the end result will allow both the market and banks to gain more in the end. Take a Foolish stance and don't follow the herd.

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