by Dan Burrows | July 18, 2013 12:38 pm
Just acknowledging ahead of time that this will probably jinx things, and maybe it’s all too good to be true … but we’ll say it anyway:
The “Big Six” banks look like they’re back.
Morgan Stanley (MS) closed out a strong season for big bank earnings in fine fashion Thursday. The investment bank even got a green light from the Federal Reserve to buy back its own stock.
JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS) and now Morgan Stanley all posted impressive, Street-beating earnings for the second quarter.
More importantly, the big overhangs that have been weighing on the sector and investors’ psyches have largely receded.
For the big money-center banks, we’re no longer fretting about balance-sheet health and loan-loss reserves. On the investment banking side of things, the great weights of a dearth of deal activity and sleepy capital markets have largely been lifted.
Business and consumer lending is up (even if rising rates are a new worry for banks’ mortgage operations), mergers and acquisitions are picking up, and return of volatility to markets — as they hit nominal record highs — means good things for I-bank trading desks.
Perhaps most encouraging, the big banks posted better-than-expected results in a quarter in which the U.S. economy actually slowed down. If the economy and corporate earnings really do accelerate in the second half — as they are widely expected to do — the best-performing bank stocks could have even more upside ahead.
As good as the S&P 500 and Financial Sector SPDR ETF (XLF) have been this year, the top-performing big bank stocks have smoked them. Here’s the scorecard for year-to-date price performance:
Indeed, if you created a mini-ETF of just the three top stocks, you’d have a market- and sector-crushing bet that would actually offer some decent industrywide diversity.
A market cap-weighted index comprised of Morgan Stanley, Citigroup and Wells Fargo would have posted a price gain of 30% for the year-to-date, according to data from S&P Capital IQ.
Furthermore, that ETF would give you exposure to a wide swath of the broader industry. MS offers a play on deals, trading and wealth management. Citigroup gives you retail and investment banking, as well as unparalleled international exposure. Wells Fargo, the biggest mortgage lender, plugs you into a resurgent housing market.
MS, Citi and WFC have some key catalysts, too:
The bottom line is that if you’re bullish on equities, you have to be bullish on financials — and banks, in particular. The market doesn’t deliver sustained gains without them.
And if you’re looking for outperformance among the Big Six, MS, C and WFC look to have plenty of upside left.
As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.
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