The prospect of rate increases might have seemed like a boon for banks in 2022, but wage inflation is looking to cast gloomy skies over the financial sector.
That was evident with banks starting 2022 off on the wrong foot with global investment firm JPMorgan notching its smallest earnings beat in the last couple of years.
“Higher-than-expected expenses drove a 14% decline in fourth quarter profit to $10.4 billion, while revenue was nearly unchanged at $30.35 billion,” CNBC reports. “JPMorgan said in its release that it took a $1.8 billion net benefit from releasing reserves for loan losses that never materialized; without that 47 cent per share boost, earnings would have been $2.86 per share.”
One of the headwinds JPMorgan faces is a tighter labor market. With not enough talent to draw from the prospective employee well, the firm is having to pay higher wages in order to attract or retain employees.
“It is true that labor markets are tight, that there’s a little bit of labor inflation, and it’s important for us to attract and retain the best talent and pay competitively according to performance,” said CFO Jeremy Barnum, noting that higher expenses and modest revenue present forthcoming headwinds for the firm.
As mentioned, however, working against the push is the pull of rising rates. That could help shore up revenue from lending products as rates start to rise, should the Federal Reserve get more aggressive with a tighter monetary policy.
A Bearish Financials Play
For traders looking to amplify their gains on being a bear in financials, one opportunity is the Direxion Daily Financial Bear 3X ETF (FAZ ). The fund has picked up a 2% rise in the past five days, and should more negative earnings results from banks ensue, it’s worth a look to scalp some profits.
FAZ seeks daily investment results that equate to 300% of the inverse (or opposite) of the daily performance of the Russell 1000® Financial Services Index. The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.
The index is a subset of the Russell 1000® Index that measures the performance of the securities classified in the financial services sector of the large-capitalization U.S. equity market. Given its triple leverage, experienced investors only need apply.
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