By Sunny Oh
Don’t bet on a stimulus package to rescue bank stocks.
Even after a round of upbeat earnings last week, investors have shied away from the U.S. financial sector which has failed to share in the broader market gains since March.
The lack of a rebound indicates deeper, fundamental concerns are holding back bank stocks even if lawmakers hash out a deal, according to Nikolaos Panigirtzoglou, a quantitative strategist at J.P. Morgan.
“While stimulus expectations post the U.S. election should be supportive for traditional cyclical and value stocks, it may not have the impact the consensus currently assumes,” said Panigirtzoglou, in a late Friday note.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.24% has risen more than 7% year-to-date, the Financial Select SPDR exchange-traded fund /zigman2/quotes/209660484/composite XLF -0.32% remains down nearly 19% over the same stretch.
Investors have assumed a more aggressive stimulus package out of Washington would finally give a lift to equities considered more sensitive to the vicissitudes of economic growth.
But Panigirtzoglou said two factors help to explain why bank stocks are likely to remain out of favor.
U.S. financial institutions have retrenched their lending as many looked to guard their balance sheet against the uncertainty presented by the COVID-19 pandemic. The lack of growth has capped their appeal, he said.
Total loans expanded by $600 billion in the first-quarter of this year, then stabilized in the following quarter, and then contracted by $190 billion in the months between July and September.
That’s despite defaults among sub-investment grade corporations, or “junk”-rated businesses, running at half the pace than forecast and banks now trimming the reserves they held against any future losses from loans.
In addition, investors may be taking into account the copious amounts of bonds bought by the major central banks. Larger central bank balance sheets could cap any rise in longer-term bond yields and thereby limit the steepening of the yield curve as a result of new stimulus spending.
The yield curve represents the spread between short and longer-term yields, and is often a proxy for bank profitability as a larger spread indicates a financial institution can enjoy a bigger margin from taking in deposits and then making a longer-term loan.
The yield spread between the 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -6.91% and the 10-year note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -4.54% was at 61 basis points, a few basis points narrower than its mid-June level of 69 basis points.