- Interest rates will continue to rise with inflation concerns
- Finding opportunities is becoming more difficult
- Could bank shares be about to turn around and head north?
With the Fed continuing to take us into a rising rate cycle, you’d be forgiven for thinking banks would be one of the better performers this year, but that’s not the case. One of the larger financial ETFs, SPDR Financial (NYSEARCA: XLF ), is down about 20% right now from January levels. And that includes a recent rally that has lifted it from the 52-week low it hit in July.
It appears that red-hot inflation and the subsequent worsening consumer sentiment are proving too much of a headwind for what would otherwise be a fundamental reason to go long banks. But that’s not to say there isn’t an opportunity to be had, especially with the broader sector ETF hitting a low two months ago. Could bank shares be about to turn around and head north for the last quarter of the year? Let’s take a look at three of them that are worth considering.
Bank of America (NYSE: BAC)
First up is Bank of America. Their shares are up 15% since July and are showing some sideways action right now around the mid-$30 level. This kind of consolidation was much needed after the months-long slide that saw them fall from the $50 mark they were trading at in February. Although their latest earnings report missed analysts’ expectations, management still felt confident enough to increase the dividend by 5%.
This is considered one of the strongest signals a company can give to the market, and investors thinking of taking some exposure to the financial sector would do well to take note. This is because the reverse action, reducing or canceling a dividend, can be so disastrous. So by virtue of the fact that they are confident enough in the company’s ability to sustain this new payout for the foreseeable future, we can infer that they are gaining confidence in the company’s ability to continue to grow.
Considering shares are still trading down 30% from the all-time highs they reached earlier this year, it’s reasonable to believe they may well be trading at a discount here.
Next up is JPMorgan, which trades at a market cap roughly 25% greater than Bank of America’s. Like its peers, JPMorgan has seen its shares trade largely sideways in recent weeks as the selloff has dried up. Technically, there’s a lot to like about them right now.
Looking at their chart, we can see that the stock has managed to post a series of higher highs and higher lows since July, a technical setup that almost always indicates a rally is forming. The stock’s relative strength index (RSI) also rises like the MACD. This latter indicator has actually just had a bullish crossover and is moving further into positive territory.
All of these confirm the move to Peter Richardson at Berenberg, who earlier this summer upgraded his rating on JPMorgan from Sell to Hold. He saw headwinds like reduced banking activity, halting share buybacks and rising expenses as all quite temporary, pointing out that much of the downside risk for the bank was already priced into stocks. Further confirmation that this headwind is disappearing will do much to push stocks up and out of the recent consolidation pattern.
Last, but certainly not least, Goldman Sachs, which is by far the best performer of the three stocks in this article. While Bank of America and JPMorgan shares are down 22% and 25%, respectively, since the start of the year, Goldman shares are down just 15%. They have also risen the most in recent weeks, and at one point were up as much as 30% from the lowest in July.
Fundamentally, Goldman has earned a strong reputation on Wall Street for having one of the better diversified banking businesses. They have multiple revenue-generating verticals such as investment banking, global markets, asset management and wealth management, all of which combine to deliver more than $11 billion in revenue on a quarterly basis, beating consensus at last count.
This diversification means they are not as exposed to cyclical swings and is one of the main reasons their shares have outperformed most of the sector this year. For those who want to get involved in some banks but are hesitant to buy stocks that are down more than 20% this year, Goldman is a solid option to consider.