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Barron's: Low Volatility Will Push Bank Stocks Higher

Barron's: Low Volatility Will Push Bank Stocks Higher

By    |   Monday, 03 June 2019 09:05 AM

Low volatility should push the prices of bank stocks higher in the near future, Barron’s reports.

Since the beginning of 2018, bank stocks in the S&P 500 have tumbled 9%, while the broader index has gained 6% during the same period. However, Christopher Harvey at Wells Fargo thinks bank shares will rise for a variety of reasons.

“U.S. banks have seen significant improvement in their fundamentals, but the market has been slow in recognizing the trend,” Harvey wrote in a note this week, Barron’s reported.

Since the financial crisis, banks have been subject to stricter regulations and passed eight stress tests by the Federal Reserve, Barron’s said. Banks have improved their balance sheets, kept solid credit profiles, and limited risky mergers and acquisitions. The sector has been returning more capital to investors through dividends and buybacks, and that has helped keep share prices more stable, Harvey says.

Bank stocks are less risky now than they were years ago, but still trade at a very compressed valuation, Harvey says.

By the end of 2016, there were no bank stocks in the Invesco S&P 500 Low Volatility ETF (SPLV). "Now, they have a notable representation of 2.8% in the fund, including Wells Fargo (WFC), U.S. Bancorp (USB), and People’s United Financial (PBCT). Although that is still less than banks’ 5.6% share in the S&P 500, their representation is likely to expand," Barron's explained.

"As of April, 10 out of 19 bank stocks in the S&P 500 fell into the bottom 40% of the basket with lowest 12-month realized volatility, according to Harvey. Some potential candidates for the Invesco Low Volatility ETF in the future include JPMorgan Chase (JPM), BB&T (BBT), and M&T Bank (MTB), who have the lowest volatility among their peers," Barron's said.

As low-vol gets more traction, banks’ stocks should be lifted as well, and fundamental investors will eventually follow, Harvey predicted. “Eventually price will follow the fundamentals, and that is what’s beginning to happen,” he wrote.

Meanwhile, Reuters reported that cash is still king for investors heading into the summer slowdown.

Stashing cash started during the global rout across financial markets late last year as investors worried about a global economic recession. Increasing a cash buffer is typical during times of economic and geopolitical strife.

But data and interviews with global wealth managers show that hoarding has continued at unusually high levels even as global stocks have rallied this year amid conflicting signals after the central banks’ U-turns, mixed macroeconomic data and fresh tumult in Washington’s spat with China, Reuters explained. 

However, many U.S. investors have still been lured by the outperformance of U.S. Treasury bonds compared with total returns in U.S. equities over the past six months.

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Low volatility should push the prices of bank stocks higher in the near future, Barron’s reports.
bank, stocks, shares, volatility
Monday, 03 June 2019 09:05 AM
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