Omicron Sends Financial institution Shares Seesawing

However since Thanksgiving, when the Omicron variant emerged, the KBW fell as a lot as 8%, greater than the drop within the S&P 500. Financial institution shares rallied Monday and Tuesday, roughly halving their post-Thanksgiving losses.

Banks play a central function within the American financial system, so the outlook for U.S. development causes their inventory costs to swing greater than broader stock-market indexes.

Some buyers say that the current bout of volatility hasn’t modified their optimism. They’re betting that the U.S. financial system will proceed to rebound, which can maintain fueling financial institution shares. Banks plunged at first of the coronavirus pandemic, however they’ve held up effectively since then, avoiding massive losses of their shopper items and churning out income of their Wall Avenue arms.

“It didn’t take a lot ingenuity to determine that when the financial system recovered, folks can be excited about banks,” mentioned

Fredric E. Russell,

founding father of Fredric E. Russell Funding Administration Co. in Tulsa, Okla.

Mr. Russell mentioned he elevated his purchasers’ holdings of Financial institution of America by about 50% a bit greater than a 12 months in the past. The financial institution’s inventory has been on the upswing for a lot of the 12 months, although it’s down about 6% since Thanksgiving. Mr. Russell is worried that the Omicron variant will impinge on financial development, however hasn’t decreased his place within the inventory.

Wells Fargo & Co., JPMorgan, Morgan Stanley and

Goldman Sachs Group Inc.

GS 2.78%

adopted an analogous sample. All of them fell after Thanksgiving, however are nonetheless up greater than the broader market this 12 months.

Even with the current declines, the KBW is up 38% this 12 months via Monday. If that holds, it will be the index’s greatest annual achieve since 1997.

Traders try to parse whether or not Omicron is only a non permanent blip or a longer-term drag on the broader financial system. They’re additionally making bets on whether or not the best inflation in many years will curb Individuals’ potential to climate even a small downturn. That might problem financial institution shares, whose worth good points already replicate the optimistic financial outlook, buyers say.

Financial institution shares have taken a circuitous path for the reason that pandemic started within the spring of 2020. Initially, fears of huge mortgage defaults pressured the biggest lenders to sock away tens of billions of {dollars}, which eroded their income and depressed share costs. Shares rebounded after the banks mentioned their mortgage portfolios had been performing higher than anticipated.

Now, although, banks are coping with a unique drawback: lackluster mortgage demand. Individuals saved up cash once they had nowhere to go. Companies borrowed by accessing the capital markets and taking forgivable loans from the federal government. Rock-bottom rates of interest additionally ate into curiosity revenue.

Not too long ago, that has began to vary. Internet curiosity margins, the distinction between what banks pay to borrow and what they earn from lending, rose within the third quarter from a report low, based on the Federal Deposit Insurance coverage Corp. Financial institution executives say they’re additionally seeing indicators that mortgage demand is selecting up.

For a lot of buyers, the query of whether or not financial institution shares can sustain the momentum hinges on whether or not the Federal Reserve’s anticipated charge rises can tame inflation with out curbing development.

“Persons are nonetheless shopping for into monetary shares on the expectation that there’s going to be a rising charge atmosphere,” mentioned

Dave Wagner,

a portfolio supervisor at Aptus Capital Advisors in Cincinnati.

For a lot of this 12 months, he elevated the quantity of financial institution shares within the actively managed exchange-traded funds he runs. He trimmed his holdings earlier than Omicron hit.

Write to Ben Eisen at ben.eisen@wsj.com