Wells Fargo & Co WFC shares are trading lower by 2.0% to $55.17 Monday afternoon. The stock is pulling back after rallying last week following the news of the Federal Reserve’s unexpected 50-basis-point rate cut.
Wells Fargo’s sensitivity to interest rate changes and investor speculation about the short-term effects on profitability has caused the stock to be volatile in recent sessions.
What Happened: Last week’s larger-than-expected cut lowered the federal funds rate to a range of 4.75% to 5%, which was perceived as a positive development for Wells Fargo. Banks like Wells Fargo typically benefit from lower short-term borrowing costs, as they can access cheaper funding and potentially increase their net interest margins in the near term.
Additionally, lower interest rates tend to stimulate borrowing by consumers and businesses, which could lead to increased loan demand and higher interest income for Wells Fargo. This potential for immediate growth in lending and profitability likely contributed to the stock’s initial rise, as investors anticipated a more favorable environment for the bank.
Read Also: What The Options Market Tells Us About Wells Fargo
Furthermore, the Federal Reserve’s statement that inflation was moving sustainably toward 2% added to the market's confidence. As inflation concerns eased, the economic outlook seemed more stable, which would benefit Wells Fargo's business, as consumer and business confidence is critical for maintaining strong lending activity.
The prospect of additional rate cuts, as indicated by the Fed's dot plot, suggested a longer period of easier monetary policy, further fueling the short-term enthusiasm for Wells Fargo stock.
What Else: Monday’s subsequent pullback could reflect a more cautious reassessment of the bank’s long-term outlook. Although lower interest rates reduce short-term borrowing costs, they also typically lead to a decline in long-term rates. This could compress Wells Fargo’s net interest margins, as the bank earns less on long-term loans while still facing lower yields on its assets.
Over time, the bank’s ability to generate income from interest on loans could be hampered in a prolonged low-rate environment, reducing profitability. Investors likely became concerned that while the initial rate cut seemed positive, the extended path of rate reductions might hurt Wells Fargo's ability to sustain its earnings over the longer term.
Additionally, the Federal Reserve's updated economic projections painted a less favorable picture for future growth. The downward revision in real GDP growth forecasts, coupled with higher unemployment projections through 2026, signaled a weakening economy.
This raised concerns about potential loan defaults, as higher unemployment often leads to increased credit risk. Wells Fargo, which holds large portfolios of consumer and business loans, could face rising delinquencies and losses in a slower economy.
The bank’s exposure to consumer credit, mortgages and commercial loans means that an economic downturn or a prolonged period of sluggish growth would directly impact its earnings.
How To Buy WFC Stock
By now you're likely curious about how to participate in the market for Wells Fargo – be it to purchase shares, or even attempt to bet against the company.
Buying shares is typically done through a brokerage account. You can find a list of possible trading platforms here. Many will allow you to buy ‘fractional shares,' which allows you to own portions of stock without buying an entire share. For example, some stock, like Berkshire Hathaway, can cost thousands of dollars to own just one share. However, if you only want to invest a fraction of that, brokerages will allow you to do so.
In the the case of Wells Fargo, which is trading at $55.21 as of publishing time, $100 would buy you 1.81 shares of stock.
If you're looking to bet against a company, the process is more complex. You'll need access to an options trading platform, or a broker who will allow you to ‘go short' a share of stock by lending you the shares to sell. The process of shorting a stock can be found at this resource. Otherwise, if your broker allows you to trade options, you can either buy a put option, or sell a call option at a strike price above where shares are currently trading – either way it allows you to profit off of the share price decline.
According to data from Benzinga Pro, WFC has a 52-week high of $62.55 and a 52-week low of $38.38.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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