Time to Load Up on Bank Stocks?
Have you ever noticed how much bank fees are? This is why I always view the bank stocks as a place to have some invested capital, as these institutions are geared toward making money regardless of the economic situation. As well, banks generally fare well as interest rates rise, which is what should occur over the next few years.
Saying bank stocks are viable investments is an understatement. True, there are the risks such as the subprime crisis in 2008 that wreaked havoc in the banking sector.
The banking sector had been underperforming in 2016 due to the low interest rate environment held in check by the Federal Reserve.
Yet bank stocks have been rallying on increasing optimism that the Federal Reserve will raise interest rates for the second time since its December rate hike.
The feeling was that an interest rate hike would be delayed until September or later but now the feeling is that Fed Chair Janet Yellen could initiate another rate hike as early as the June meeting in a few weeks.
The Federal Open Market Committee (FOMC) minutes from the April meeting suggest the central bank would consider raising interest rates at the June meeting, depending on the economy and jobs.
While the economy continues to show slower growth than desired, a small rise in inflation and continued job creation, with the unemployment rate hovering at around five percent, makes me think the Fed could take that step in June.
The higher probability of a June rate hike is helping drive up bank stocks.
The Time Is Now for Bank Stocks
With a move toward a higher interest rate environment, banks can charge higher financing rates for loans, which will in turn drive up the net interest rate spread. This means bigger profits for the banking sector and bank stocks.
A look at the valuations of the banking sector shows many banks trading much lower than their tangible book values, which is a positive signal in my view.
The risk, of course, is Democratic presidential hopeful Bernie Sanders has vowed he was going to force the big banks to break up if he was to win the White House.
Now, I wouldn’t bet on the outspoken Vermont senator getting the Democratic nomination over Clinton, but there’s a chance that equally outspoken Donald Trump could win the presidency. I doubt Trump will destroy Wall Street, though.
So let’s assume that the status quo for the banking sector will, more or less, stay intact for the next four years or more.
We know the trajectory for interest rates is heading higher so it’s a good time to consider adding bank stocks now and not when rates are already rising.
Under this investment scenario, you could collect dividends while also participating in the capital appreciation of the share price. It’s a good strategy in my books.
I don’t recommend jumping in all at once—rather, it should be done steadily.
You can consider buying the big banks or one of the numerous exchange-traded funds (ETFs) that focus on the domestic or global banking sector.
Possible banking sector ETFs to look at include Financial Select Sector SPDR Fund (NYSEARCA: XLF), SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE), or the iShares S&P Global Financials Sect.(ETF) (NYSEARCA:IXG), which comprises 48% U.S. banks and 52% global financials.