{"id":8125,"date":"2019-07-29T19:18:17","date_gmt":"2019-07-29T19:18:17","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8125"},"modified":"2022-02-26T13:07:14","modified_gmt":"2022-02-26T13:07:14","slug":"high-performing-bank-stocks-defy-flat-yield-curve","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/high-performing-bank-stocks-defy-flat-yield-curve\/","title":{"rendered":"High-performing bank stocks defy flat yield curve"},"content":{"rendered":"\n

Low interest rates coupled with a flat yield curve usually\nmean bank profits will come under pressure. Generally speaking, the flatter the\nyield curve, the lower a bank\u2019s net interest margins \u2013 which is the difference\nbetween what a bank earns on loans versus what it pays out in interest on\ndeposits. J.P. Morgan saw its net interest margin fall to 2.49% in the second\nquarter (from 2.57% in Q1), while Wells Fargo\u2019s fell from 2.91% to 2.82%.1<\/sup>\nFor banks, these represent paltry margins. <\/p>\n\n\n\n

The Yield Curve is\nMore \u201cU-Shaped\u201d than Inverted<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Source: U.S. Department of the Treasury2<\/sup><\/em><\/strong><\/p>\n\n\n\n

Yet in the second quarter, Financials were the best\nperforming sector. Financial stocks delivered nearly double the return of the\nS&P 500 in Q2, climbing +8.0% versus the S&P 500\u2019s +4.3%. How and why\ndid bank stocks do so well?3<\/sup><\/p>\n\n\n\n

______________________________________________________________________________________________<\/sup><\/strong><\/p>\n\n\n\n

See What\u2019s Next for the Market with our Midyear Market Strategy Report<\/a>4<\/a><\/sup><\/strong><\/p>\n\n\n\n

In our just-released market strategy report, we take\ninventory of the market\u2019s performance so far in 2019 \u2013 what\u2019s driving it,\nwhat\u2019s challenging it, and what needs to happen in order for stocks to break\nthrough to new highs<\/strong>. We also take a look at the fixed income markets,\nwhere we note that global bond yields are on the decline, and the U.S. yield\ncurve is interestingly \u201cu-shaped.\u201d <\/p>\n\n\n\n

Get deeper insight on the following:<\/p>\n\n\n\n

  1. The Global Economic Expansion Continues, But for How Long?<\/li>
  2. The Fixed Income View<\/li>
  3. Keeping an Eye on the Geopolitical Climate<\/li>
  4. The Bottom Line for Investors <\/li><\/ol>\n\n\n\n

    If you have\n$500,000 or more to invest and want to learn more about these forecasts, click\non the link below to get your free report today!<\/p>\n\n\n\n

    Download Our Just-released 2019 Midyear Market Strategy Report!<\/a><\/strong><\/p>\n\n\n\n

    ______________________________________________________________________________________________<\/sup><\/p>\n\n\n\n

    The answer can be found by taking a closer look at the\ndivergence between consumer confidence and business confidence in the current\nU.S. economic climate. While consumers are growing increasingly confident and enjoying\nthe tailwinds of a modestly strong economy, businesses are growing increasingly\nconcerned about how much longer the business cycle may last. <\/p>\n\n\n\n

    Let\u2019s start with the consumer. The United States currently\nhas near record low unemployment, low interest rates, wages modestly on the\nrise, and a stock market near all-time highs. In the mind of the consumer,\ntimes are good. High confidence and low interest rates often lead to more\nspending and borrowing, which is helping prop up bank profits. <\/p>\n\n\n\n

    Indeed, banks that cater to the Main Street consumer have\nbeen enjoying a surge in profits in consumer lending divisions. Banks like J.P.\nMorgan, Wells Fargo, and Citigroup \u2013 which all have large lending and credit\nbusinesses \u2013 saw profits climb in the second quarter. At J.P. Morgan, credit\ncard spending climbed 11% to $192.5 billion in the second quarter, while outstanding\ncredit balances jumped 8% to $157.6 billion. J.P. Morgan enjoys status as the\nlargest U.S. lender by assets, but Citigroup and Wells Fargo also felt the\nboost. Purchase volume at Citi rose 8% in Q2 while balances rose 6% at\nWells. Mortgage origination and refinancing was also higher at all three banks\nin Q2, as the rate on a 30-year fixed mortgage fell below 4%. <\/p>\n\n\n\n

    Note:\nwhether or not rising credit balances and new\/refinanced mortgages is a good\ntrend for consumers is another story for another day, but in the meantime,\nbanks have been feeling the profitable effects. <\/em><\/p>\n\n\n\n

    Meanwhile, banks with smaller consumer credit\nand lending divisions, like Goldman Sachs, saw profits fall in the second\nquarter. Goldman was the only U.S. bank to report lower profit in Q2 versus\nwhat it reported in Q1, with a 6% decline fueled by slower activity in trading,\ninvestment banking, and corporate debt issuance.  <\/p>\n\n\n\n

    Herein lies the tale of two confidence\nmeasures. On the one hand, consumer confidence is high and rising on the heels\nof low unemployment and low interest rates. On the other, business confidence\nis mixed as global economic growth is seen slowing and as the U.S. and China\ncontinue apace with a trade dispute that has no tangible end in sight. <\/p>\n\n\n\n

    Where businesses are reluctant to borrow and\ninvest in expansion and growth, consumers feel confident enough to keep\nspending and running-up credit balances. The key question is whether banks\u2019 reduction in business lending\nis due to lower confidence or to a lack of investment opportunity. But it may\nalso be a byproduct of sinking demand \u2013 publicly traded corporations have been\nborrowing heavily in debt markets largely to buy-back stock, which would seem\nto indicate the issue is a lack of investment opportunities.<\/p>\n\n\n\n

    Goldman Sachs has responded to this new\ndynamic by pivoting to cater to Main Street consumers, rolling out a personal\nloan and consumer banking division known as Marcus. But the investment bank has\na lot of ground to make up to compete with the likes of Bank of America, J.P.\nMorgan, Citigroup, and Wells Fargo.5<\/sup> <\/p>\n\n\n\n

    Bottom\nLine for Investors<\/strong><\/p>\n\n\n\n

    Banks are adapting to an environment where \u201csmaller\nfish\u201d are a better source of profits than the larger deals that hinge on\nactivities like debt trading, corporate\nlending, and investment banking. At the end of the day, from a macro\nperspective, this dynamic is being driven by lower global investment\nopportunities available to corporations. Effectively, I see a global oversupply\nof money available for lending, which drives down interest rates.<\/p>\n\n\n\n

    For\ninvestors, this means Financials should not be dramatically underweighted\nrelative to benchmarks. Ultimately, consumer-focused lending likely has some\nroom to run. However, how bank stocks perform is likely to be driven by whether\nthe yield curve continues to invert. My best estimate, based on leading\neconomic indicators, is that the yield curve will normalize but at a lower slope\nthan we\u2019ve seen historically.<\/p>\n\n\n\n

    Want more insight on what\u2019s next for the market? Don\u2019t miss our just-released Midyear Market Strategy Report. <\/a><\/strong><\/p>\n\n\n\n

    This\nreport takes inventory of the market\u2019s performance so far in 2019 \u2013 what\u2019s\ndriving it, what\u2019s challenging it, and what needs to happen in order for stocks\nto break through to new highs<\/strong>. <\/p>\n\n\n\n

    Get deeper insight on the following:<\/p>\n\n\n\n

    1. The Global Economic Expansion Continues, But for How Long?<\/li>
    2. The Fixed Income View<\/li>
    3. Keeping an Eye on the Geopolitical Climate<\/li>
    4. The Bottom Line for Investors <\/li><\/ol>\n\n\n\n

      If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!6<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"

      High-performing bank stocks defy flat yield curve. But is the shift to consumer-oriented services sustainable for banks?<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-8125","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8125","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=8125"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8125\/revisions"}],"predecessor-version":[{"id":10733,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8125\/revisions\/10733"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8125"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8125"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8125"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}