(C) Reuters. Banks Well-Positioned with U.S. Fed Behind Them
Shares of financial companies and banks outpaced the broader market in the post-FOMC rally on Wall Street on Thursday.
In early afternoon trade, the Financial Select Sector SPDR Fund (XLF) gained 2.9%, compared to 1.6% by the S&P 500. Bank of America Corp. (NYSE:BAC) gained 2.6%, Citigroup Inc. (NYSE:C) gained 3%, and JPMorgan Chase & Co. (NYSE:JPM) gained 1.9%.
I am neutral on all stocks mentioned above.
Banks In a Good Spot
Banks are in an excellent spot these days.
First, they stand to benefit from the Fed’s policy of “tapering but not tightening,” meaning rolling back its bond-buying program, but leaving short-term interest rates unchanged.
That’s music to the ears of bankers, as this policy is expected to push long-term interest rates higher, widening the difference between long-term and short-term interest rates (called the “spread”). That’s something already evident in the U.S. Treasury market today, where the 10-year Treasury bond yields have climbed above 1.4%.
Banks benefit from a widening spread, as they borrow on the short-term of the yield curve from depositors, and lend money on the long end of the yield curve.
Second, banks stand to benefit from a recovering economy and a robust housing market that creates strong demand for loans. However, home sales have tapered off recently due to low inventories, and delayed deliveries by homebuilders.
In addition, economic recovery will help keep loan delinquencies and defaults low, releasing more reserves for additional loans.
Third, banks could benefit from the easing of global financial instability caused by Evergrande’s (EGRNF) woes.
Wall Street’s Take
Banks have a strong analyst following, with Moderate to Strong Buy ratings.
For instance, Citigroup is rated a Strong Buy, while JPM and Bank of America are rated Moderate Buys.
Apparently, there’s some concern in the analyst community about insider selling, decreased hedge fund activity, and the rise of peer-to-peer lending that could undermine conventional financial intermediation. Analysts are also concerned about the “buy now pay later” trend, which could endanger the credit business of big banks.
Financial stocks and banks are well-positioned for further gains as they have the Fed and the economy on their side.
Disclosure: At the time of publication, Panos Mourdoukoutas had no position in any of the stocks mentioned.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
Banks Well-Positioned with U.S. Fed Behind Them
Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.