Times are very, very good right now for JPMorgan Chase & Co. (NYSE:JPM) and JPMorgan stock.
Following a successful Investor Day, the bank has declared a 56-cents-per-share dividend, promised to deliver all its future income to shareholders, and recruited Mellody Hobson, a black woman, to its board.
Smart money is pounding the table for the stock, calling it among the best-run banks in the country. Even Warren Buffett regrets not having gotten in when the getting was good. Some are wondering when it gets to a market cap of $500 billion, now just $103 billion away.
But with a price-to-earnings ratio of 16.7 and a yield of about 2% that could easily rise with the dividend, why not jump in now? And why isn’t Buffett jumping in now?
How Good Is Too Good?
With the Federal Reserve about to raise rates and more rate hikes expected, this would seem to be a good time to buy bank stocks, which are in the business of selling money for more than they pay for it.
But with the recovery now nine years old, some Morgan analysts are getting antsy. Co-president Daniel Pinto is even predicting a 40% correction in the stock market.
Still, Morgan is a big bank, and it has bulls inside it as well as bears. The bank is officially telling clients not to worry about the risks of inflation and trade wars. Predicting good times now, and hard times to come, is a good way for the bank to cover its bets. Either way, it can claim to have been right.
Our Lawrence Meyers is among those in the bull camp. He calls JPMorgan stock a “slam dunk,” with income growing 10-20% this year and massive tailwinds from Americans “levering up,” or taking on more debt.
What Worries Me
It’s these trends that have me personally worried.
It’s usually at the height of the party that the music stops. I have been through several recessions in my career, and none were expected at the time. Recessions can’t be predicted.
But with banks winning deregulation from Washington and $1.5 trillion in new federal debt coming from the tax bill, there are ample signs of a financial engine overheating.
The deregulation bill now before Congress would specifically benefit regional banks like U.S. Bancorp (NYSE:USB), with a market cap of $86 billion, by removing Dodd-Frank regulation while retaining it for bigger banks like Morgan. In theory, that should let the smaller bank’s performance catch up — JPMorgan stock has been outperforming it twice over for two years.
Bottom Line on JPMorgan Stock
We are closer to the end of the current recovery than its beginning. Laws that restrict bad banking behavior aren’t usually needed early in a correction. Now, when they’re about to be dissolved, is when they’re needed.
Bank stocks, especially big ones, are highly cyclical because their performance is tied closely to that of the general economy. After the dot-com crash of the early 2000s, JPM stock was cut in half. The same thing happened, faster, during the Great Recession.
When the economic music stops, you don’t want to be in the big bank stocks. When the music stops, the party is often so loud you won’t hear it.
JPMorgan stock has looked like a tech stock since the Trump election. The shares traded at $67 just before the 2016 election and opened for trade Mar. 21 at $114. If you buy now, be ready to sell.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
