A pedestrian wearing a protective mask stands outside a JPMorgan Chase & Co. bank branch in New York, U.S., on Friday, April 10, 2020.
Mark Kauzlarich | Bloomberg | Getty Images
The bounce in financial stocks could be a good sign for the broader stock market if it continues.
The financial sector is like an early warning signal for the economy, and the stocks have been lagging the broader market and every other sector but consumer staples since the March low. They have gained just 25% since March 23, compared to the 33% gain in the S&P 500. Financials are also about 29% below their January high, lagging just energy, which is 38% from its 52-week high set in July.
“I think a bounce in banks is good in general,” said Sam Stovall, chief investment strategist at CFRA. “Usually the financials in general, the banks in particular are the canary in the coal mine because the economy really can’t grow unless the banks are lending. If investors believe people will not be borrowing then they will be borrowing then they have a lot of problems.”
The Financial Select Sector SPDR ETF rallied 5.1% Monday, as banks surged after Fed Chairman Jerome Powell said the Fed can do more to help the economy. Banks also moved higher with the broader market on optimism about a potential coronavirus vaccine, which showed good results in early trials. The financial sector, up 5.3% Monday, was third-best sector behind energy and industrials.
Investors have avoided the group for fear the recession will crush profitability and result in rising loan losses. The stocks rallied last week, after Powell said he opposed negative rates, which would be bad for bank profitability, but then fizzled Friday.
Mike Mayo, Wells Fargo banking analyst, said there was also positive news for the group, when Warren Buffett’s Berkshire Hathaway disclosed that its holdings continue to be heavily in banks, even though it sold a large chunk of a long-held stake in Goldman Sachs and shed some of its JPMorgan stock.
“Buffett still has basically his biggest investment in history in the banks. That’s quite a statement. He’s not afraid to bail when something’s not going the way it should. The best investor of all time has his biggest investment ever, less 3%, in banks. Maybe he knows something the market is missing,” Mayo told CNBC in an email.
Mayo notes that Buffett’s holdings remain in Bank of America, Bank of New York Mellon, and M&T Bank. Berkshire also built higher stakes in PNC and U.S. Bancorp, Mayo added. He said for short-term investors, bank shares may see a catalyst if the yield on the 10-year rises to 1.25% as Wells Fargo expects by years end. Rising yields Monday were also a factor behind the gain in banks as the 10-year edged up to 0.72%.
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