Fed ‘Put’ Lacks Key Ingredient Bulls Dare Not Ignore

Just one day after the Federal Reserve said the economic outlook was such that it couldn't support even one interest-rate increase this year, the S&P 500 Index responded by setting a new high for the year. Clearly, investors were overjoyed with the prospect that the Fed had their backs. Maybe the party would have been less ebullient if anyone bothered to check in on the banks.

Rather than joining in the fun, the benchmark KBW Bank Index fell for a third straight day, closing at its lowest level since mid-January. Its decline Wednesday was the worst on the day of a Fed announcement since 2011. The concern here is that the Fed’s moves will only serve to suppress market rates, putting further pressure on the already razor-thin difference between the short-term rates banks pay on their own borrowings and the long-term rates they charge lenders. In the banking business, this is known as the net interest margin. With the trajectory for net interest margins set to get tougher, the "party’s over" for banks, Robert W. Baird & Co. senior research analyst David George wrote in a research note. “Bank valuations are tempting – especially relative to the broader market – but given higher odds that NIMs grind flat-to-lower into the end of the cycle, investors should remain disciplined with bank exposure,” George wrote.