Where to Next for Big Banks?

Of all the industries available to investors, few offer more long-term stability than the banking industry.

This is not to say that the banking industry has stellar growth prospects; on the contrary. After the US presidential election outcome on November 8, 2016, many pundits were expecting bank stocks to soar.

Trump Trade was geared towards deregulation of the corporate sector, a repeal and replace of Obamacare, renegotiating trade arrangements (NAFTA TPP etc.), and lower corporate taxes (15% – 20%), among others. President Donald J. Trump has attempted to make good on his campaign promises, but he has been blocked by lawmakers across the spectrum.

Nonetheless, traders and investors interested in bank stocks have plenty of reasons to celebrate, irrespective of who runs the White House. The reason: The Federal Reserve Bank.

Recall that the Fed is responsible for monetary policy in the United States. More importantly, the decisions taken by the Fed are often considered a litmus test for the actions to be taken by central banks around the world. The Bank of England, the Bank of Canada, the European Central Bank, and the Bank of Japan often consider the actions taken by the Fed as part of their ‘global positioning strategy’.

It should be remembered that the Fed reversed course on monetary policy after the 2009 Global Financial Crisis.

The Fed dramatically cut interest rates, bought up securities, and accelerated the velocity flow of money through the US economy. This was done to try and stimulate economic growth at a time where belt-tightening, job losses, and a credit crunch were affecting the US economy. The hope was that a low federal funds rate would encourage investment in the US, and encourage banks to expand credit offerings.

Recent Trends in Financial Markets

Many of the major stock funds in the US have been adding bank stocks to their portfolios. For example, Bank of America (BAC) remains a highly sought after option with some $450 million recently invested in the Charlotte, North Carolina bank.

Bank of America offers a wide range of professional services to individuals and businesses including risk management, asset management, banking and investing. It caters to SMEs and large-scale corporate enterprises around the world. Presently, Bank of America stock is trading at $24.03 per share (July 17, 2017), with a 52-week low of $13.82 and a 52-week high of $25.80.

Bank of America Corporation stock has a consensus recommendation rating of 2.2, on a scale when 1.0 represents a strong buy and 5.0 represents a sell. Most Reuters analysts consider it a buy option. More importantly, BAC has outperformed expectations in each of the past 4 fiscal quarters.

From Q2 2016 through Q1 2017, the actual figures have exceeded forecasts by a long margin. Bank of America stock began trading at $22.53 per share at the start of the year, and reached a high of $25.50 on 1 March. The stock lost momentum – like many other bank and financial stocks – after it became clear that Trump Trade was mired in political molasses.

BAC stock has been on the ascendancy since 23 June, and is continuing its bullish run

Analysts Remain Quietly Confident

Morgan Stanley (MS) stock is currently trading at $45.14 per share, down slightly heading into June 17, 2017. The stock is equally bullish, and is trading on expectations of monetary tightening. Deregulation, lower corporate taxes and interest rate hikes bode well for stocks like Morgan Stanley (MS) and others.

Morgan Stanley has a 52-week high of $47.33 per share, and a low of $27.77 per share. Over the past 4 quarters, the actual earnings have exceeded estimates on every occasion. In Q1 2017, actual earnings were reported at $1, with estimates at $0.88. On a rating scale of 1.0 (strong buy) – 5.0 (sell), MS is a clear buy at 2.3.

According to Harold R. Fulbright, a Stern Options trading expert, benefits from bank stocks are long-term oriented. ‘The exuberance which the banking industry faced in early 2017 has faded to a degree. Market players are now pricing in a modest, yet consistent increase in bank stock prices over the next two years. The Fed is likely to increase the Federal Funds Rate further in 2017, making good on its promises of at least three rate hikes for the year. This will invariably strengthen the position of US banks, so long-term appreciation is the order of the day.