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Why Interest is Rising in Bank Stocks

Why Interest is Rising in Bank Stocks
With the Great Recession a distant memory, the financial sector hopes to cap a great recovery.

U.S. NEWS & WORLD REPORT
MARCH 12, 2019 - INVESTING
By Lou Carlozo


"Bank stocks, in particular, do well when interest rates are headed higher and prospects for economic growth are strong."

NOT ONLY CAN YOU BUY shares on Wall Street: You can literally buy shares in Wall Street, as the financial sector boasts some heavy hitters so far as dividend stocks go.

Yet putting your money in banks (as in banking and finance stocks) isn't a sure thing by a long shot. Just ask those who wiped out on Bear Stearns in 2008, or watched their shares in Citigroup go on life support around the same time; the company lost 93 percent of its value in 19 months when it hit a rock bottom of $17.80 in March 2009.

Very few people bought Citigroup back then – but if you did, you've seen the investment leap, with shares today trading at about $62. And the quarterly dividend that was only worth a penny a share back in 2013? It's up to 45 cents.

So is all that bad news from the Great Recession finally, finally faded into the rearview mirror for the financial sector? Certainly, banks such as Wells Fargo & Co. (WFC) have been badly beaten up by scandal and mismanagement; its share price has remained flat for the past five years.

But experts agree that the sector as a whole could have a strong year, with the threat of a new recession appearing distant for the time being.

"In our opinion, the outlook for banking stocks is positive based on their improved fundamentals," says Kian Salehizadeh, senior analyst at Blockforce Capital, an asset management firm based in San Diego. "Over time, the banking sector has recovered and perhaps is in an even better position than pre-crisis levels. In the aftermath, the Federal Reserve put in place stress tests to ensure banks have enough capital. Banks have overall performed well in these tests."

And should the Federal Reserve begin to raise interest rates again in 2019 – a move many see as likely – banks will benefit in a way that businesses in other sectors won't. For while it will get more expensive, say, for entrepreneurs to borrow money, higher interest rates are a boon for the folks that lend the money in the first place.

"The impending U.S. interest hikes may have a negative impact on the performance of equity markets. However, the banking sector is likely to benefit in such a move due to increased margins, if rates are hiked over a prolonged period," Salehizadeh says.

"Bank stocks, in particular, do well when interest rates are headed higher and prospects for economic growth are strong," says Mason Williams, chief investment officer for Coral Gables Trust Co. in Florida. "Interest rates were steadily on the rise until late in 2018, when the Federal Reserve announced it would be more patient in its approach to future rate hikes. As a result of this news, and signs of a slowing global economy, longer-term interest rates have hit a wall, which could limit upside this year."

"If you think the economic expansion is likely to continue, I believe the financial sector will lead the way," says Steve Azoury, financial advisor and owner of Azoury Financial in Troy, Michigan. "There have been some big winners in the sector and a good choice to gather many of these stocks will be a good mutual fund. One such fund would be the Fidelity Select Brokerage and Investment Management Portfolio (FSLBX)."

And if you're looking for an individual winner, "Goldman Sachs (GS) continues to dominate the financial sector," Azoury says. "With worldwide influence, they are benefiting from rising interest rates, as well as the expansion." The dividend sure looks healthy, too, up a third since 2015 to a quarterly payout of 80 cents per share.

"Bank of America (BAC) looks like the best value for money center banks for next few years," says Dory Wiley, president and CEO of Commerce Street Holdings in Dallas. He cites the consensus opinion that expanded earnings per share will lead to good news, and BAC has recovered nicely since December: up 26 percent from its Christmas Eve trough.

"The pick of the litter in big banks is JPMorgan Chase (JPM)," says Robert Johnson, a professor of finance at Creighton University's Heider School of Business. "In the most recent quarter, Berkshire Hathaway (BRK.A, BRK.B) increased its already sizable stake in JPM by 40 percent. It's one of the best-managed banks, as Jamie Dimon has been at the helm since 2004."

In case you missed that part about Berkshire Hathaway, remember: It's the company billionaire Warren Buffett built. And if he's putting his money in that bank these days, you might want to get out of the teller line and make a beeline for your financial advisor's office.

That noted, Buffett is a long-term investor, which is quite remarkable, given that he's 88 and his vice chairman Charlie Munger is 95. This is not a sector for someone looking to time the market or make a quick score.

"Financial firms are more volatile and sensitive to economic trends so they should be held by investors with a longer time frame," says Andrew Aran, partner at Regency Wealth Management in Ramsey, New Jersey. "That said, if economic growth slows but remains positive and rates are stable, earnings will continue to be harvested allowing for incremental dividend increases for a sector that is cheap to the market."

View article on U.S. News & World Report

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