Analyst Sees Bank Stocks Good Picks in Slowdown

Bank stocks

Bank stocks took a pretty big hit in 2018 in spite of the banks themselves performing very well. If things end up slowing during 2019, bank stocks may outperform this time.

To look at the business performance of banks, we would have thought that 2018 would have been a very good year for them. Banks as a whole put in record profits last year, but their stocks seriously underperformed the market. 2018 wasn’t a particularly good year for the stock market, so this meant losses, and some pretty significant ones at that.

The punishment in 2018 started in January and continued throughout the year. Citigroup, for instance, reached its peak of the year on January 26, when it poked above $80 a share, and by the time December rolled around, the stock had dropped below $50.

Bank of America traded at $32 in January 2018, and fell to $23 in December. JP Morgan Chase went from $116 in January to $94 in December. Wells Fargo dropped from $65 to $45 over this time. If the banks did so well on the profits side, no one told the stock market it seems, or at least they didn’t listen or care.

While business performance does play a role in stock performance, it is only one of several factors. Fundamental data itself, of any type, whether it relates to a company’s business performance, their forecasted performance, current and future economic data, and anything else external to the actual trading of a stock, are only as important as the market thinks it is, and this is why we need to look to the market for confirmation of any investing ideas that we may have.

This both matters when we are looking to enter a stock position and while we hold it, and it’s the period when we’re holding stock that people tend to take their eyes off of things or in some cases don’t even dare to look.

Bank Stocks are Normally Pretty Sensitive to Economic Changes

There are many who stubbornly cling to fundamental data in the face of market rejection. When the two do battle, the market always wins because this is the field that the game is played on. In 2018, the fundamentals of bank stocks looked good, but the market did not care and drove them down anyway, and this is a good example of how these things can diverge.

It is true though that investors look beyond the current year and often several years ahead, and the thinking could have been that with leaner times on the horizon, this may hit bank stocks particularly hard down the road, and longer-term investors may have fled for greener pastures, at least pastures that aren’t so dependent upon the economy continuing to grow at what is seen as a desirable pace.

As it turned out, we are indeed facing a slowdown over the next couple of years at least, if the forecasts are correct, and they certainly have been thus far with the dropping GDP rate we’re seeing now after a pretty good 2018 on that front.

As this new information surfaces, telling us things are looking worse now, both bank stocks and the market in general have moved up pretty nicely, so once again, you can’t just rely on these things in isolation without looking at what is actually happening with price.

Looking forward though, we may wonder how bank stocks may fare under these more constrained economic conditions. Bank stocks have rallied over the last 3 months along with the market, but with this move stalling, and bank stocks being more sensitive to the concerns that are standing in the way of a further move up, it would be pretty natural to think that they are exposed to more risk and to consider this as we look to manage our positions with them and potential entry points if we’re not invested in them presently.

RBC’s Cassidy Shares His Positive Outlook on Banks

Analyst Gerard Cassidy of RBC Capital Markets sees this all differently though, and is bullish on bank stocks at this point in time. The potential for a further economic slowdown doesn’t worry Gerard, it actually seems to excite him.

Gerard looks to a similar period in time, between 1994 to 1998, where we had a slowdown but not enough to put us in a recession, and over these years, bank stocks outperformed the market.

This at least provides evidence that slower economic conditions do not necessarily cause bank stocks to outperform the market, although this is just one instance. We don’t want to read too much into something like this though, other than perhaps us questioning our ideas of why this shouldn’t be happening.

Cassidy sees this as a good time to invest in bank stocks, and the fact that they are still quite a bit lower than they were at the start of 2018 in his view provides the opportunity to take advantage of “attractive valuations.”

A lot of analysts pay a lot of attention to fundamental data like valuations, and especially valuations, but that’s not how the stock market values stocks. Valuations do matter sometimes, but this all depends on how much the market values these valuations and what else they value and act upon, and this is why we see quite a divergence in fundamental valuation among stocks.

When something is moving up, it’s not that bad of an idea generally to jump on, provided that we are willing and eager to jump off if our idea fails or transitions from working to now failing at some point. We don’t want to get in when the evidence in the market is to the contrary, when we think a stock will go up but it’s going down instead, or stay in too long when the idea behind the trade becomes violated later.

Even if our view may be correct over the long-term, where for instance bank stocks lose 20% this year but provide a good return 10 years from now, there’s just no good reason to take this pounding right now when there may be a better time to enter, at a lower price, when the dust from this storm settles.

Cassidy tells us that he believes bank stocks have been unfairly beat down, and seeing this or any other market action as unfair does tell much about his view of how stock prices work. The fact that all is fair in love in war is pretty questionable, but we never need to wonder whether the stock market is fair, unless you are confused about what is doing the real deciding. The ultimate decider is not fundamental value, it is the market itself, and whatever it decides ends up being the truth and the whole truth.

Cassidy’s insights into this 1994-1998 period can be actually seen as informative, if for no other reason than to make us at least question our preconceived notions of how these things may play out in the future. The divergence between fundamentals and price that we saw with bank stocks in 2018 also can help shake up our notion that fundamentals drive prices, and while fundamental data can be helpful, we still need to have our other ducks in a row with it to make these insights useful and even valid, which especially includes price action.

A better way to view this may be to look more to interest rates if we are seeking something to decide on aside from price movement with bank stocks. When we do, the selloff in 2018 actually made a lot of sense, as does the recovery since December. Rates aren’t expected to go up this year now and may even be going down. While we might think that we should be looking at profits instead, if the market is looking at interest rates, we need to as well, because the market gets to decide this, not profits, or us.

Bank stocks may end up outperforming the market in 2019, and perhaps are a good buy right now, but more from the fact that they are going up right now overall combined with the friendly interest rate outlook we have, not because of valuations or from an isolated instance from the past. What we certainly want to avoid is staying in them if the market ends up turning their backs on these stocks, where we take the punishment, raise our fists, and call it all unfair. If we want to play this game, we need to keep our eye on the ball.