In early June, Wells Fargo (NYSE:WFC) shares offered the most encouraging sign that the banking sector was ready for a comeback. At the time, the May jobs report was much stronger than anticipated, suggesting that the doom-and-gloom naysayers were dead wrong. Not surprisingly, then, Wells Fargo stock skyrocketed.
Unfortunately, the optimism was short-lived, even though further encouraging news, including May’s retail sales report, indicated that the economy was benefiting from pent-up demand. But that wasn’t enough to overcome sharply rising novel coronavirus cases during the summer. As well, surging social unrest which occasionally turned to violence overshadowed any enthusiasm for Wells Fargo stock.
But with Covid-19 cases again on the mend, should investors reconsider the bullish argument for WFC? If the net interest income forecast is anything to go by, prospective buyers should stay on the sidelines. According to Bloomberg reporter Hannah Levitt:
The bank had previously said it expected 2020 net interest income — revenue from customer loan payments minus what the bank pays depositors its largest source of revenue — to drop to $41 billion to $42 billion, or down as much as 13% from last year. Weaker-than-expected loan demand is responsible for the more pessimistic forecast for its largest source of revenue, Chief Financial Officer John Shrewsberry said Monday.
Don’t think I’m just picking on Wells Fargo stock. Although based on recent performances — WFC looks less stable than JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) or Bank of America (NYSE:BAC) — no one should be comfortable with the big banks.
And that’s because as bellwether stocks, something is wrong when they underperform gold.
Gold is the Ultimate Repudiation of Wells Fargo Stock
If you’re one of my regular readers, you may know that I already discussed the inverse relationship between gold and Wells Fargo stock. In August, I mentioned that in terms of average year-over-year returns, these two have a cyclical, inverse relationship: as one goes up, the other goes down.
Further, because the reckless deficit-spending has not been reconciled – and also because we’re about to blow up our budget in an unprecedented manner –gold and WFC stock may be at a major inflection point. One could soar in value while the other plummets.
The million-dollar question is, which one? If I’m looking at all the fundamentals and interpreting them correctly, you want to be very careful with your exposure to Wells Fargo stock.
Between 1995 through 2002, gold and WFC recorded a negative 81% correlation coefficient. Between 2005 through 2010, and between 2011 through 2019, the negative coefficients were 56% and nearly 85%, respectively.
So far this year, gold and WFC have an inverse 73% correlation. While Wells Fargo stock has struggled to gain traction, gold bullion has been soaring to record highs. Therefore, if history is any guide — and I think it’s a pretty good one right now — you would expect this inverse relationship to continue for at least the next few years.
And you know what? It would make perfect sense. Wells Fargo is already admitting that weaker-than-expected loan demand has hurt its forward projections. My only question is, who the heck within its ranks was pinging a positive outlook?
Really, you don’t have to be an economist to recognize the terrible plight that awaits Wells Fargo stock. As I mentioned in my last article about WFC, 85% of independent restaurants could go out of business. We may see similar pain in other industries.
The Banking Sector Is Desperately Out of Touch
Indeed, if I’m reading the latest unemployment report from the U.S. Bureau of Labor Statistics correctly, it’s virtually guaranteed that small businesses outside the restaurant sector will experience devastation. And that will have a material impact on Wells Fargo’s loan demand moving forward.
Currently, the BLS reports that white men have an unemployment rate of 6.9%. In contrast, Black workers have an unemployment rate of 13%, Asians at 10.7%, and Hispanics at 10.5%. So, in a twisted way, the coronavirus has been a positive development for many whites: they can enjoy their high-paying office jobs from home.
But that doesn’t help Wells Fargo. Because one of the great pre-pandemic stories was that immigrants and communities of color were starting their own businesses. Today, that narrative has been flushed down the toilet.
Worse, the pandemic has put a blight on many individuals’ finances. Thus, moving forward, they may not qualify for loans under a traditional commercial bank’s risk assessment standards. But that also creates an opportunity for fintech innovators to address the “last mile” problem of the lending industry. If we don’t have a solution to this crisis soon, fintech may be poised for a massive disruption.
Still, this is an unknown. And there are many of these unknowns in this new normal. As a result, investors are piling into the safety of gold. Just look at the asset flows into the physical commodity exchange-traded fund SPDR Gold Shares (NYSEARCA:GLD). That should tell you all you need to know about Wells Fargo stock.
On the date of publication, Josh Enomoto held a long position in gold.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.