Bank stocks sit out rally, mirroring concern for broader economy

Shares of financial stocks are not participating in Thursday's Fed-inspired rally. A concerned U.S. Federal Reserve Bank cut its forecasts for further interest rate increases from two to zero on Wednesday. Fed watchers interpreted the dovish Fed move on Wednesday as a signal of concern over U.S. growth prospects amid worries in Europe, and to some extent, China. YIELD CURVE NARROWS: As longer-term bond yields decline, the yield curve flattens due to the narrowing of the gap between yields on short-and long-term treasuries. Banks depend on profitability from lending at the long term rate and borrowing at the shorter term rate. The profitability of lenders typically declines with a flattening of the yield curve. "Yield curves are responding to what they see, to what I believe is a global economic slowdown," said Peter Boockvar, Chief Investment Officer at the Bleakley Advisory Group, on CNBC earlier. BANKS ARE KEY ECONOMIC INDICATOR: In an earlier Wall Street Journal article, Ed Cofrancesco, CEO of International Assets Advisory, said, "banks are key components to our economy, so much that if they don't do well, they're a drag on the market and the economy as a whole." Publicly traded companies in the space include Bank of America (BAC), Citi (C), Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS), U.S. Bancorp (USB), and Wells Fargo (WFC).

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