It was the announcement heard around the world. With consumer prices soaring to the moon, executive members of the Federal Reserve began worrying about runaway inflation. Therefore, the central bank signaled at least three interest rate hikes in 2022, which on paper boded well for bank stocks. However, the rotation out of risk-on assets sent jitters everywhere else.
Indeed, throughout most of January, investors dove for cover, shifting their funds away from growth-oriented opportunities into assets that commanded a historical reputation for reliability and passive income streams. Fueling the fire was Goldman Sachs (NYSE:GS), one of the biggest bank stocks in the world. Analysts there generated headlines when they stated that their forecast calls for five rate hikes this year.
Again, in theory, such a monetary backdrop should be conducive for bank stocks. With higher interest rates, lenders will enjoy greater profitability. However, one of the biggest issues with this thesis is that the cost of borrowing money will obviously rise, translating to a disincentivizing profile for entrepreneurs and businesses seeking financing. In turn, this dynamic could hamper economic growth, possibly forcing the Fed to again inject stimulus.
However, the jobs report for January may have given the central bank even more reason to tighten the money supply. If all things are equal, a hawkish monetary policy facilitates a deflationary environment: less money is chasing more goods. However, the employment numbers suggest that there’s plenty of opportunities on the table. Thus, raising rates could be good for bank stocks without hurting the rest of the economy.
Of course, it’s important not to read into any one statistic. Still, if employment figures remain robust, the Fed would be incentivized to pop certain asset bubbles to keep consumer spending going. In that case, these bank stocks could benefit.
- JPMorgan Chase (NYSE:JPM)
- Bank of America (NYSE:BAC)
- Citigroup (NYSE:C)
- Wells Fargo (NYSE:WFC)
- Charles Schwab (NYSE:SCHW)
- Truist Financial (NYSE:TFC)
- Prosperity Bancshares (NYSE:PB)
Although it’s an intriguing idea, every thesis has flaws or weaknesses. Before investors dive into the above bank stocks, you should note that money velocity — or the rate at which each unit of currency circulates throughout the economy — has remained near all-time lows since the doldrums of 2020. That’s one among many risk factors to note before proceeding forward.
Bank Stocks to Buy: JPMorgan Chase (JPM)
No discussion about bank stocks would be complete without mentioning JPMorgan Chase. Though this earnings season has witnessed some major blue-chip giants suffer disappointing results, that wasn’t the case for JPM, which delivered fourth-quarter earnings and revenue that beat out analysts’ consensus targets. Despite the encouraging figures, the market was less than pleased, dumping JPM shares.
Since the beginning of the year, the equity unit is down almost 6%, which isn’t exactly confidence-boosting considering the positive performances of other bank stocks. However, investors could be overreacting to the not-so-great news about Q4; namely, higher structural expenses moving forward.
Nevertheless, JPMorgan chairman and CEO Jamie Dimon stated that his company “reported solid results across our businesses benefiting from elevated capital markets activity and a pick up in lending activity as firmwide average loans were up 6%.” Further, Dimon added, “We remain optimistic on U.S. economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth.”
And upbeat business sentiment is exactly what the economy is delivering to JPM, per the aforementioned jobs report. Therefore, this might be a discount among bank stocks to pick up.
Bank of America (BAC)
Following the aftermath of the 2008 financial crisis, Bank of America was in rough shape, having to resort to a $20 billion bailout, as well as a “guarantee for almost $100 billion of potential losses on toxic assets to cushion the blow from a deteriorating balance sheet at Merrill Lynch & Co, its recently acquired brokerage,” per a January 2009 Reuters report.
Today, it’s in a much better situation. On a year-to-date basis, BAC is up 11%. Not only does that compare very favorable to sector king JPMorgan Chase, it’s also a lesson in contrast with the broader S&P 500 index, which finds itself down over 6% over the same period.
Part of the positive print is due to its Q4 earnings report, with BofA topping profit estimates on better-than-expected credit costs, per a CNBC article. To be fair, the company’s revenue came in slightly under the consensus target. However, its noninterest expense increase to 6% — driven by higher worker pay — represented a smaller outlay than many other bank stocks.
Over the trailing week, BAC is up 6%, possibly signaling future cash inflows as the money supply tightens.
Bank Stocks to Buy: Citigroup (C)
While the Bank of America bailout during the Great Recession was massive, it pales in comparison to what Citigroup received. During the troubles, the federal government injected a whopping $45 billion into the financial institution, saving it from a mountain of toxic assets that would have otherwise sunk the company.
I’m not here to rehash old controversies, but since you, the taxpayer, provided the funding for the bailout — whether you agreed to it or not — it’s worth reminding ourselves of these policy decisions because they were certainly not free. It’s also a reminder about how important voting is.
Anyways, Citigroup features a much cleaner look now, with shares up nearly 5% YTD. Furthermore, a 3.3% swing higher over the trailing week suggests more money will be making its way to C stock. Should the January jobs report be more than a flash in the pan, investor optimism may be justified.
From a CNN Business report, the Fed essentially has a late Christmas gift thanks to the ability to raise rates without rupturing a delicate economic recovery.
Wells Fargo (WFC)
Although Wells Fargo is also one of the major financial institutions that took government bailout money during the aftermath of the 2008 crisis, it’s arguably more notorious for the fake account scandal that occurred between 2002 and 2016 that rocked the brand’s reputation. It’s also paying dearly for it, with Wells agreeing to pay $3 billion to settle criminal and civil charges right before the pandemic upturned the world.
While the health crisis is on balance a gut-wrenching tragedy, Wells management team might feel otherwise. If anything, it’s kept the brand out of the public crosshairs. Adding to its good fortune is the company’s performance. With a YTD return of 23%, WFC easily beats out the big four bank stocks.
Better yet, the quarterly numbers help support bullishness for the firm attempting to revitalize its reputation. For Q4, Wells Fargo easily beat out both earnings and revenue projections. A key highlight is the bank’s return on equity, which nearly doubled to 12.8% from 6.6%.
While executives have made sweeping changes to the firm, it must still work within constraints due to the fake account scandal. Still, investors like the new direction this company is heading in, making it one of the bank stocks worth considering.
Bank Stocks to Buy: Charles Schwab (SCHW)
A multinational financial services company, Charles Schwab offers multiple services including banking, commercial banking, investing and related solutions, such as consultation and wealth management. Admittedly, SCHW is more aligned with the broker industry than with bank stocks. Still, I’d like to include it on this list because the company presents a relevant opportunity in the post-Covid era.
As you know, the trailing two-year period saw the rise of extreme speculation. That’s not mere conjecture. According to the Financial Industry Regulatory Authority, stock trading on margin — one of the negative catalysts for the market crash of 1929 and the subsequent Great Depression — soared to all-time highs recently. However, one of the positives of this environment is that a monkey throwing darts could probably act as a good investment advisor.
Unfortunately, that circumstance is unlikely to continue. Not only is the Fed signaling rate hikes, but we’re also entering into an arena of uncertain geopolitical winds. For instance, the U.S. still has conflicts with China while Russia has entered the frame in the last few months. Therefore, investors need true guidance to navigate these waters, something that Charles Schwab should excel at.
Truist Financial (TFC)
While it’s usually a good idea to bet on big bank stocks if stability and reliability are your main concerns, it may also make sense to share the love with regional players like Truist Financial. Headquartered in North Carolina, the company serves its southern neighbor along with several other states on the east coast and Midwest.
Primarily, I believe TFC could make for one of the more intriguing bank stocks due to shifting workforce expectations. Assuming that the grand telecommuting experiment stemming from the Covid-19 pandemic becomes a permanent situation, more people — especially higher-income workers — may move out to states like the Carolinas for lower costs of living.
I’ve always marveled at what you can buy in almost any other state not named California or New York. Now that folks are able to take their paycheck wherever they go, a move out of overpriced metropolitan areas simply makes sense.
To be clear, I’m a little bit hesitant regarding the stickiness of the work-from-home initiative. But if it is permanent, make sure to keep close tabs on Truist Financial.
Bank Stocks to Buy: Prosperity Bancshares (PB)
Among my friends that want to move out of California, Texas must be the number-one state that dominates the discussion. Certainly, the Lone Star State has plenty of stuff going for it: no personal income taxes, reasonable cost of living (especially compared to the Golden State) and if you don’t like someone, you can take matters into your own hands.
I’m being facetious about the last bit: definitely don’t do that without legal justification as Texas doesn’t mess around with its justice system.
But if you’re looking for a family friendly environment and greater personal freedoms, I’ve heard plenty of good stuff about Texas, which brings me to Prosperity Banchares, one of the top regional bank stocks. Serving Texas and Oklahoma, Prosperity may see increased relevance due to migration patterns within the U.S.
For instance, Houston and Austin tend to rank highly as good places for young professionals. As well, Texas itself ranks as the top state for migrating millennials. Such trends were already in place well before the pandemic, meaning that PB stock isn’t wholly dependent on the work-from-home initiative being permanent.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.