Previously plagued low interest rates and concerns about consumer defaults, the SPDR S&P Bank ETF (NYSEArca: KBE) and the broader Financial Select Sector SPDR (NYSEArca: XLF) are among the financial services ETFs that are bouncing back in significant fashion.
Banks are typically more sensitive to consumer and business spending so the stocks were among the heaviest hit during the coronavirus-related economic slump. Furthermore, as U.S. Treasury yields started to inch higher, banks also picked up the pace. Some analysts believe there’s more upside to be had with bank ETFs.
“They’re still priced like the global financial crisis, and that’s a complete disconnect to the stock market as a whole, and frankly it’s a disconnect to what the bond market says about banks,” said Wells Fargo bank analyst Mike Mayo in a recent interview with CNBC.
Boon for Banks
More recently, bank stocks have been strengthening after U.S. May private payrolls declined less than expected, which suggests that the layoffs are slowing as businesses reopened and states begin to ease stay-at-home restrictions.
As recently as late last month, more than half of domestic banks were trading below tangible book value – the book value of its common shares, less intangible assets, such as loan servicing rights, goodwill, and deferred tax assets. Among the 11 S&P 500 sectors, the financial services sector has been this year’s second-worst performer, or just ahead of the hardest hit energy.
Bargain hunters who are looking for some of the worst-hit areas of the market may consider bank and consumer discretionary sector-related ETFs to capture the bounce back.
“Still, Mayo said the stocks have further to go. He cited last week’s jobs report, which saw the economy add 2.5 million jobs instead of shedding more like many expected and increasing consumer loans as reasons to be bullish, among other data points. The early signs of a possible economic recovery make it less likely that the banks will face a serious crisis of their own, Mayo said,” according to CNBC.
Moreover, bank stocks and ETFs like KBE and XLF are poised to benefit as the U.S. economy continues the post-coronavirus reopening process.
“Wells Fargo increased its price targets on all the banks it covers last week, with Mayo telling CNBC that larger banks were in a strong position. On Monday, he said the economic restrictions and stay-at-home orders implemented to slow the spread of the coronavirus have forced customers to use digital banking tools, which is an advantage for larger banks that have been able to invest heavily in that area,” according to CNBC.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.