Bank guru Dick Bove is warning savvy investors once again: Don’t always believe what you read.
“On bank stocks, a majority of experts argued that increasing interest rates were supposed to lift bank stocks. Instead, bank stocks are under performing the S&P,” he wrote for CNBC.
Here's what the bulls are missing about bank stock performance, explained Bove, an equity research analyst at the Vertical Group and the author of "Guardians of Prosperity: Why America Needs Big Banks."
“Start with their view on interest rates; it simply made no sense. They argued that banks cannot make money when interest rates are low for long periods and that bank interest rate margins would be up sharply if the Fed raised rates. Yet from 2010 to 2016, interest rates were the lowest in recorded history and bank earnings went up in all but one of those years. Bank profits were at all-time record levels in 2013, 2015 and 2016,” Bove wrote.
“Bottom line, all the financial gimmickry and false hypothesizing in the world is not going to offset the very real fact that banks need to sell more products to bolster their stock prices. One hopes that they will do this. If they do then it will be time to buy these stocks,” he wrote.
To be sure, have the third-worst performance among 11 S&P 500 Index groups in 2017, and are on track for the poorest year relative to the market since 2011, Bloomberg reported.
Yet of the 10 equity strategists surveyed by Bloomberg, nine give banks and insurers the highest recommendation and only one holds a neutral view.
That’s in stark contrast with their stance on the rest of the market, where market leaders from technology to health-care fetch no more than four buys. Every group other than banks garners at least one sell rating.
There has been no shortage of defensible reasons to be bullish on banks at various times this year. They’re viewed as the biggest beneficiaries of the Trump administration’s promise to loosen regulations and cut taxes, and lenders looked set to rally when the Treasury curve steepened amid tighter monetary policy. It’s just that, so far, none of that has happened.
Call it misplaced love, but prognosticators from Goldman Sachs Group Inc.’s David Kostin to Savita Subramanian of Bank of America Corp. haven’t given up just yet. The rally is coming, they say, and it’s not reliant on the Fed tightening. Donald Trump and Congress will eventually ease regulations and cut taxes. Banks also offer a valuation discount and plan to boost buybacks.
“What the market is getting really wrong right now is the fact that financials are trading in lockstep with the 10-year. It’s insane,” Subramanian said in a recent interview on Bloomberg Television. “What’s not to love about a sector that’s cheap and is returning cash to shareholders?”
Strategists are not alone in sticking to their optimism. Investors in exchange-traded funds have added $4.3 billion this year to those focused on financial shares, the second-most among sectors tracked by Bloomberg.
(Newsmax wires services contributed to this report).
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