Why it's a bullish backdrop for big bank stocks

Jerome Powell’s Federal Reserve has long pivoted back to being super dovish. The 10-year yield has dived to about 2.6%. And markets have since been lulled into seemingly churning upward each day to reach the fall 2018 highs, absent the daily swings that traders at the investment banks crave. Hey, they have to get paid people.

Indeed this isn’t often a bullish backdrop for big bank stocks. But it is now.

While the moves in big-cap tech stocks such as Microsoft (MSFT) and Netflix (NFLX) have garnered much attention, it’s the action in the banks that deserve a greater discussion. Because as many say on Wall Street, as goes the bank stocks goes the global economy. The SPDR S&P Bank ETF has gained 18% year-to-date, according to Yahoo Finance data, outperforming the Dow Jones Industrial Average (^DJI), S&P 500 (^GSPC) and Nasdaq Composite (^IXIC).

Bank stocks are ‘doing fine’

“The reason financials — and specifically banks — are likely doing fine despite lower interest rates is bank lending trends are strengthening,” suggests SunTrust Chief Markets Strategist Keith Lerner. “On a year over year basis, C&I (consumer and industrial) lending is up more than 10%, the best since early 2016 and overall C&I lending is at a record high.”

Lerner adds that overall bank lending is hovering near its best pace since early 2017. In other words, despite what looks to be sluggish first quarter GDP growth due to the after effects of the government shutdown and inclement weather the banks are lending at a good clip in advance of a likely second half economic rebound. Steady job growth is also probably a key contributor.

From an individual stock perspective, performance among the banks has been consistent. Bank of America (BAC) shares have led the way, up 20.5% year-to-date after it posted one of the better fourth quarters from the group. Goldman Sachs (GS) has put in a 20% gain as investors have flocked to stock beaten up in 2018 due to worries about the IMDB scandal.

Wells Fargo (WFC), JPMorgan Chase (JPM) and Morgan Stanley (MS) are up an average 10.7% year-to-date. Meanwhile, the SPDR Regional Bank ETF is up 20% this year on the back of the pending SunTrust/BB&T merger.

Explains Lerner, “With the Fed moving to the sidelines, this also suggests lower recession risks than if they continued to tighten rates. Financials tend to be one of the worst performing sectors heading into a recession. So, counterintuitively, in our view the reduced recession and credit risks are a positive for the banks, offsetting some of the lower yield concerns.”

Attractive valuations

With most sources on the Street Yahoo Finance talks with are being bulled up a lot right now, it’s only natural they have gravitated to the financials — the space was smacked around last year on economic growth concerns. Despite their rebounds, the financials still trade at attractive valuations relative to many S&P 500 components.

Having a friendly Fed appears critical to the banks on fire trade, however.

“Fund managers have lived and died by central bank liquidity for over a decade now. Fresh injections of liquidity have naturally left them more optimistic about financial developments and the medium-run outlook in the out years of 2020 and beyond,” says Quill Intelligence strategist and Fed expert Danielle DiMartino Booth.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter@BrianSozzi

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