Here Come The Bank Stocks?

By: Spencer Israel

Through the first 50 weeks of 2020, the financial sector was the second-worst performing S&P sector of the year.

The Financial Select Sector SPDR Fund’s (XLF) -7.5% year-to-date return was better only than the Energy Select Sector SPDR Fund’s (XLE) -34%, as four of the six largest U.S. banks (JP Morgan, Bank of America, Citi, and Wells Fargo) have failed to recover from the sell-off in March.

But that may change. On Friday, the Federal Reserve announced, in an otherwise unsurprising stress test result, that it was lifting the temporary ban on buybacks put in place on the banks in June. (Dividends, however, remain capped. The central bank said banks can pay out dividends up to their average quarterly income for 2020.)

In response, JP Morgan announced a $30 billion buyback. Morgan Stanley authorized a $10 billion buyback beginning in Q1. Citigroup, Bank of America, and Wells Fargo all said in statements with varying degrees of specificity they would resume buyback programs as well.

On Monday, financials was the only sector in the green.

It’s not just the big banks. Over the last three months, the SPDR S&P Regional Banking ETF (KRE) has more than tripled the performance of the S&P 500 and nearly doubled the performance of the tech-heavy Nasdaq 100.

All this begs the question: is this the time for bank stocks?

The near-record amount of loan loss provisions stacked up by the big banks in Q1 and Q2 was meant to fortify their balance sheets against bad loans, but such losses haven’t really come to pass according to S&P Global.  And in addition to the resumption of buybacks and lower-than-expected loan losses, banks will also benefit from a steepening of the yield curve.

Plus, there’s also the vaccine to consider. If the COVID-19 virus really does get under control and we can get back to normal, there’s no telling the economic whiplash that could occur.

This is, of course, the glass half full approach. Bank stocks have been beaten down with the expectation that the economic carnage from the pandemic would eventually roll to them. So there’s good reason to be skeptical of one of the few sectors that hasn’t rallied in 2020.

But investors have shown a propensity to want to buy the dip this year. And sometimes, all it takes for them to flock to an out-of-favor sector is a catalyst. Friday’s Fed’s announcement could be that catalyst.

The author is long the S&P 500 in his retirement accounts.

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