Editor’s note: This column is the latest update in our Best Stocks for 2014 contest. John Jagerson and Wade Hasnen’s pick for the contest is the Financial SPDR (XLF).
We’re nearly three months into 2014, and our Best Stocks for 2014 pick, the Financial SPDR (XLF), continues to operate in positive territory, up just more than 2% year-to-date, which makes it a great time to check in on our recommendation.
Let’s take a look at what’s keeping the XLF above water.
Stress Test Update
Stress test expectations actually appear to be the largest bullish driver of XLF price increases so far this year.
On March 20, the Federal Reserve released the first portion of its two-part Comprehensive Capital Analysis and Review (CCAR), or “stress test.”The Fed announced that 29 out of the 30 financial institutions that were tested — including XLF top holdings Wells Fargo (WFC), JPMorgan Chase (JPM), Bank of America (BAC) — passed the stress test. This means they “have sufficient capital to continue operations throughout times of economic and financial stress and robust, forward-looking capital planning processes that account for their unique risks.”
After the market closes on March 26, the Fed will release the second portion of its stress test results, which will inform these financial institutions whether they are allowed to move forward with their capital distribution plans — via increased dividend payments and/or stock repurchasing programs.
If the big financial institutions that comprise the majority of XLF’s holdings receive permission to move forward with their capital distribution plans, watch for those stocks — and XLF as a result — to move even higher.
Net Interest Margin Update
Since the beginning of 2014, net interest margins have actually contracted a bit. The yield on the 10-Year U.S. Treasury has dropped from ~3% to ~2.75%. However, while the margin is slightly tighter, it is still much wider than it was through most of 2013, which should benefit the financial sector’s bottom line.
General Economic Growth Update
The U.S. economy continues to grow at a steady pace. The Federal Open Market Committee (FOMC) just released its economic projections for 2014, and it sees the U.S. economy growing at a pace of 2.8-3.0%.
Unfortunately, this is slightly lower than their previously expected range of 2.8-3.2%, but it is still strong enough to provide ample opportunity for business growth in the Financial sector.