Bank Stocks Could Be Sizzling Next Year
Higher interest rates could clip returns for equity investors in 2016. However, one industry is poised to profit: bank stocks. Savvy investors could be poised to make a fortune in the banking sector.
Let me explain…
The stock market has been all about the brand-name technology stocks this year, namely those found on the NASDAQ 100. While we all love to chat about the likes of Facebook, Inc. (NYSE:FB), Alphabet Inc (NASDAQ:GOOG), Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), Tesla Motors, Inc. (NASDAQ:TSLA), and Apple Inc. (NASDAQ:AAPL), just to name a few, no stock portfolio should be focused entirely on the technology sector. If you are, this lack of diversification could eventually burn you.
For many of you, think back to the crazy days in late 1999 and into early 2000 when the technology and Internet sector were sizzling unabated up the price charts with little regard for anything that resembled a reasonable valuation.
It was a ludicrous period for the stock market and we all know what happened thereafter. Then it took another 15 years for the NASDAQ Composite to get back to square one. Of course, if you account for inflation, the NASDAQ is still below its peak.
What you really need to consider is to diversify into other areas of pending growth as we head into 2016 and given what could be a higher interest rate environment.
Here’s What I’m Thinking About the Banking and Technology Sectors
Now that’s not to say you should walk away from technology, as I believe this area will continue to be the top growth sector over the next decade and more.
With interest rates likely to edge higher in 2016—unless, of course, the economy reverses course and tanks—you want to make sure you have some capital in the bank sector.
The bad loans and poor risk-taking associated with the Lehman Brothers era have more or less dissipated. The big banks have taken massive steps to cut risk. Balance sheets are stronger and there is more regulation, given the annual Federal Reserve Bank stress test that analyzes banks’ financials to determine their ability to cope based on assumptions of extreme economic conditions, such as severe recessions, high unemployment over 11%, plummeting home prices, or stocks crashing more than 50%.
The validity of the stress test gives the stock market added confidence that another Lehman episode will not happen again.
Take a look at the chart of the Dow Jones US Banks Index, comprising both big banks and regional banks. The index rallied from October 2011, but it currently is stuck in a sideways channel, looking for a breakout. It’s also still way off from its 2007 highs prior to the Great Recession.
Chart courtesy of www.StockCharts.com
With interest rates set to rise as early as in a few weeks, when the Federal Reserve next meets, this could begin the upward cycle of rates, albeit it likely will be slow. Higher interest rates mean the banks make more money, as the key interest rate spread rises. Banks can charge higher for loans, while savings and bond rates rise more slowly.
You should begin the process of adding bank stocks to your radar if you have not already begun to do this.
My favorite big banks to watch include Citigroup Inc. (NYSE:C), Morgan Stanley (NYSE:MS), The Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo (NYSE:WFC), and Bank of America Corporation (NYSE:BAC).
For those looking for potentially higher returns with the small regional banks, especially as the economy strengthens, take a look at exchange-traded funds (ETFs) like iShares US Regional Banks (NYSE:IAT) and the SPDR S&P Bank ETF (NYSE:KBE).