I’m not sure if you noticed, but the big banks and bank stocks are back as attractive investments for both income investors and those looking for more conservative capital appreciation potential, as backed up by my stock market analysis.
If you were one of the astute investors who accumulated big banks stocks after the collapse of Lehman Brothers Holdings Inc. in 2008 following the massive subprime financial crisis, then my kudos to you. It was a great move that has undoubtedly lined your pockets with profits.
We all understood the government was not going to allow the likes of Citigroup Inc. (NYSE/C) and The Bank of America Corporation (NYSE/BAC) to collapse like Lehman. That would have wreaked havoc on the country’s financial system at a time when it was vulnerable. In addition, it would have driven hundreds of thousands of workers to the unemployment line. More importantly, it would be an even bigger blow to the confidence of the world towards America’s financial system.
My Stock Market Analysis Shows Strong Banking Prospects
Take a look at the chart of the S&P 500 Banks Industry Group Index that comprises the major big banks and regional banks in the country. After a few missteps along the way, including the European banking concerns in 2012 and several sector downgrades, the banking sector has been in rally mode. I expect more gains to come over the next few years as interest rates rise.
Chart courtesy of www.StockCharts.com
The banking sector is now much more fluid and regulated compared to the speculative, risk-taking, go-for-it-all mentality that was evident during and prior to the subprime crisis.
We are seeing somewhat of a return to traditional banking where banks drive profits on fees charged to business and retail clients.
The annual Federal Reserve Bank stress test has helped to deliver a financial system that is more stable and trustworthy. At the most recent stress test involving the big banks with over $50.0 billion in assets, all but three of the banks passed based on severe economic conditions.
The assumptions adopted for the test were quite extreme; including the emergence of severe recessions, high unemployment at over 11%, collapsed home prices, and a stock market crash in excess of 50%. These are unlikely to happen, so it offers confidence to those buying bank stocks.
What is enticing is that the prospects for the banking sector are strong, as the Federal Reserve begins to raise the interest rate. This will thus expand the margins of the banks, meaning more profits. Banks make money on a number of fronts as rates rise.
Bank Stocks and the Longer-Term Portfolio
Bank stocks should be an integral part of a longer-term portfolio. The next time you look at your bank statements, you’ll understand why banks are essentially cash machines when rates rise.
Some of the top players include Citigroup, Morgan Stanley (NYSE/MS), The Goldman Sachs Group, Inc. (NYSE/GS), JPMorgan Chase & Co. (NYSE/JPM), and Wells Fargo & Company (NYSE/WFC).
For those looking for a broad approach to the banking sector, an ETF like the SPDR S&P Bank ETF (NYSEArca/KBE) may be worth a look.