According to Bloomberg News, bank stocks are performing extremely well into the earning season and the upcoming results are anticipated to be manifesting the fact that the US economy continues to roll, despite the surging fear of inflation.
As per Today’s (January 13th, 2022) Chart of the Day that is looking at KBW Bank Index that is relative to S&P 500 Value Index measured on a logarithmic scale. The chart manifests a strong bid for the debtors since the beginning of this year, thanks to the bets placed on the rate surge as early as March and with anticipations that the fourth quarter will be strong enough.
The extremely good performance mirrors within 10-year yields, implying that the segment is primarily being influenced by the monetary policies and not any other fundamentals.
The lenders that include JPMorgan Chase & Co, Wells Fargo & Co, as well as Citigroup Inc. are expected to report their results on Friday.
Bloomberg News also reports that loan growth is undoubtedly a key component in this regard. The 25 largest banks said a 3.5 % surge in lending towards December to end compared to what it was a year ago.
If we go by intuition, a booming economy must signal that there must be more loans to individuals and also business entities, which at higher rates of interest must prove to be a boon for the banks. Lending is also a crucial indicator for recovery and a prospering economy. However, the risk involved here is the situation that might arise in case there is a deceleration in the economy.
Volatility in the market is playing a crucial role as well in determining the strength of banks. In the last quarter of 2021, the VIX surged to a 31 handle while there was a drop by 1.6% in commodities after rallying 7% in the earlier quarter. This is likely to manifest itself in healthy trading revenue. Wall Street has posted profits of record trading following a period of volatility never-seen-before during the beginning of the pandemic in March 2020.
Looking at 2021, Goldman Sachs Group Inc has been able to record the best revenue from commodity trading in a decade.
Bloomberg News reports that it is worth keeping a tab on the financials as early as the value emerging turnaround from a macro perspective. As far as value stocks are concerned, they are amidst a 15-year downtrend about their growing counterparts. However, it is quite likely that the investors might opt for a position reversal. Investors have been selling dollars, indulging in riskier bets such as commodities as well as the emerging markets. With the worldwide central bank policies inflow, investors are experiencing greater distortions in correlations that are trusted.
For instance, the S&P 500 financial index that includes insurance companies and regional banks to be correlated positively, and the yield curve shows between 2 and 10 year Treasuries.
A steepening curve indicates increasing bets on an economy that is strengthening and means financial stocks thriving well. Suppose the old saying is believed to be true that the bond market is a better indicator for the health of the economy in comparison to the stock market. In that case, it may not be possible for the bank stocks to maintain the rally longer.
