Anyone who held bank stocks in 2019 had to have finished year happy. But they also know that bank stocks took one for the proverbial team last year.
Sure, bank stocks returned a tidy profit for investors, as the S&P 500 banking industry gained 31.5% in 2019. And that’s incredible, but it still lagged the S&P 500’s total return of 40.6% in this go-go market.
Who would have thought banks would be the laggards in the market? But it really had to be that way.
Bank stocks were supposed to be a big winner in 2019, as rising interest rates were expected to fuel bankers’ profits and investors’ wallets. Everything seemed rosy.
But then the China-U.S. trade war made markets tremble, fear and uncertainty gripped Wall Street. And the Federal Reserve did something nobody saw coming in January 2019 — it ended up cutting interest rates — not once or twice, but three times in 2019.
So much for those padded margins, right?
But with the benefit of hindsight, the Fed’s moves were a saving grace. Interest rate cuts helped the stock market stave off the threat of a recession and soar to new highs, extending the bull market past 10 years. Who wouldn’t trade a few percentage points of returns in the financial sector for a S&P 500 that tops 9,000?
But it also meant that bank stocks didn’t have the kind of year many thought they would have in 2019, and they begin the new year under a cloud of uncertainty.
Q4 Outlook: It’s All About the Guidance
Fundamentally, banks today look like pretty good bets. Dividend yields for most banks are higher than the yield on 10-year Treasurys, which usually indicates a bullish trend for the sector. And the forward price-earnings ratio for the nation’s biggest banks are between 9 and 13, which is well below the S&P 500 P/E of 24.
But if you’re considering taking a new position in bank stocks or expanding a current one, there’s a lot of uncertainty. Analysts are pretty much split on the fortunes of the biggest banking names in the sector.
- Bank of America Corp. (NYSE:BAC): 23 analysts are “strong buy” or “buy,” 7 are “hold.”
- JPMorgan Chase & Co. (NYSE:JPM): 14 analysts are “strong buy” or “buy,” 14 are “hold” or “underperform.”
- Citigroup (NYSE:C): 24 analysts are “strong buy” or “buy,” 3 are “hold” or “underperform.”
- Wells Fargo & Co. (NYSE:WFC): 12 analysts are “strong buy” or “buy,” 18 are “hold” or “underperform.”
On the plus side, the fourth-quarter rally in the stock market helped push bank stocks higher to close the year, giving the market some momentum to carry into Q4 earnings that begin this week.
Major banks also noted they saw heavy trading volume in the fourth quarter as the market soared, and some banks are expecting a double-digit increase in trading revenue in Q4. In fact, both JPM and Citigroup tacked on double-digit growth in their respective Q4 reports, with JPM scoring its most profitable year.
But banks will also see some pressure on net interest margins, thanks to those pesky rate cuts. And there’s growing pressure for financial companies to reduce or eliminate investment fees, as have Robinhood and online brokerages like E-Trade Financial Corporation (NYSE:ETFC), Charles Schwab Corporation (NYSE:SCHW) and Fidelity.
While Q4 numbers will be interesting, 2020 guidance will be the more important number in each report. Banks that are able to give investors good news about loan growth, keeping expenses in check and withstanding a lower interest rate environment in 2020 will be solid bets for investors.
“We expect the 2020 outlooks to garner more attention than actual results” says Barclays analyst Jason Goldberg in a research note.
The Bottom Line
It would be folly to expect banks to have another 30%-plus gain in 2020, but I’m not expecting them to trail the market for a second year in a row.
With a Federal Reserve keeping a steady hand on the wheel, a White House eager to deregulate and an economy continuing to roll along, bank stocks are a solid bet for any portfolio in 2020.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.