The rally in banks’ share prices two weeks ago was clearly too good to last. After scaling levels last seen in late 2007 over the week of September 10-14th, the Dow Jones Industrial Average and the S&P 500 have consistently fallen over the last two weeks as companies across sectors continue to lose weak. Banks, which led the rally earlier, are now leading the decline. Almost all bank stocks have lost more than half of the value they gained over the first half of this month. A significant part of this decline came this week after Philadelphia Fed President Charles Plosser that the proposed QE3 will not boost growth or employment in the country. In addition, unwarranted delays in Europe’s recovery plan, a rapidly deteriorating Spanish economy and growth concerns which led the Chinese stock market to its lowest levels in three years have all added to investor woes.
Shares of RBS (NYSE:RBS) have seen the largest decline from their peak value on September 14 – losing almost 9% of their value through this Wednesday. The largest decline among U.S. banks was for Morgan Stanley (NYSE:MS), which saw its shares fall by 8.2% over the same period. Deutsche Bank’s (NYSE:DB) shares have fallen 7.7% followed by an at least 6% reduction in price for Capital One (NYSE:COF), Goldman Sachs(NYSE:GS) and Bank of America (NYSE:BAC).
Earlier this month, investors welcomed the Fed’s long-awaited decision of initiating the third round of quantitative easing to kick-start the U.S. economy. The QE3 is expected to be open-ended with the Fed buying mortgage-backed securities worth up to $40 billion each month until employment starts to look better. The Fed also revealed its intention to keep interest rates at the current low levels at least until mid-2015, further adding to the celebration.
But, Plosser burst the expectations bubble by emphasizing that the QE3 will likely not help boost growth in the flagging economy, and it might also not arrest the country’s deteriorating employment situation. He also added that the idea of the far-reaching impact of the stimulus may actually jeopardize the Fed’s credibility. 
The sluggish pace of economic reforms in the Eurozone has also been a let down for investors who expected speedy action from the ECB after it announced its decision to pump money in the most distressed member nations by buying government notes.Notes:
- Plosser Says QE3 Risks Fed Credibility, Won’t Boost Jobs, Bloomberg, Sept 25 2012 [↩]