The last few months have seen investors scrambling to shield themselves from major economic turmoil, as aggressive interest rate hikes and soaring inflation pushes the U.S. economy closer to a looming recession.
General market indicators have tumbled since the start of the year, with geopolitical tension, severe COVID-induced lockdowns, and a tight supply chain adding increasing worries to the post-pandemic economy.
Q2 2022 hedge fund letters, conferences and more
Despite the bearish conditions, investors are struggling to sink their teeth in high-performing stocks, as overall market performance has yet to recover from earlier downturns.
Banks have been raising interest rates at a rapid clip, with the Federal Reserve yet again looking to increase its base interest rate by three-quarters of a percentage point, as the Fed’s tightening monetary policy looks to raise its policy rates to 2.25% - 2.50% range.
With this aggressive agenda at hand, investors are signaling that the hikes could soon trigger a recession, even as most of the world is still slowly emerging from the recent Covid crisis.
Americans have overall felt the burden of the economic slowdown, as consumer financial conditions stand at a 12-month low, even as 43% expect to add to their debt in the later part of the year. On the other end of the spectrum, a recent Forbes survey found that nearly 70% of Ameircans who had low interest personal loans in the past claimed it helped their overall financial situation as opposed to 6% who said it worsened their situation.
The hyperactive bearish conditions bring to question whether investors should start looking to bank stocks as a way to protect their portfolios in the face of a looming recession. Better yet, if investors are willing to pay for their share in some of the country’s most profitable and high-valued banks, which are the best to buy right - here’s a review.
Why Buy Bank Stocks?
Whether we’d like to admit it or, bank stocks have declined more heavily this year than the overall broader market. So far, the S&P 500 index (NYSEARCA:SPX) has come down roughly 16.72% year-to-date, while the S&P banking industry group has already shed more than 24.6% this year.
Although the performance of these groups has been anything but outstanding, experts still suggest that if interest rates are on the move, it’s perhaps a good time to start looking at banking stocks as a way to spruce up your portfolio.
CNBC’s Jim Cramer mentioned earlier in June this year that if the Federal Reserve can engineer a perfect landing, then bank stocks might have their time in the spotlight this coming season. Oppenheimer analyst Chris Kotowski has also been relatively bullish in terms of bank stocks after the company recently upgraded Morgan Stanley's share weakness.
The consensus on Wall Street is that banks now have more experience and knowledge on how to handle a slowing economy and the potential recession. This puts them in a comfortable position, where they can direct their focus towards stabilizing conditions, and mitigate risks for themselves and investors.
There is however some bad news to it all. If the Fed and banks are not careful enough, they might soon run straight into economic contraction. This could mean a lower or a decreased need for the services and products banks have to offer, which could lead to the increased need to control bad debt banks may have.
It’s a constant tug and pulls for seasoned investors, as it doesn't necessarily put them in the right position to make major moves on whether bank stocks are the right pick for them or not.
What Bank Stocks To Buy Right Now?
At first, it’s understandable that many investors will be wary when looking to add banking shares to their shopping list. There are a lot of risks that come with these purchases, but with the markets’ current high volatility, investors are facing challenging uphill battles at each opening call.
Here’s a look at some promising banking stocks investors could perhaps consider right now.
Goldman Sachs
Goldman Sachs (NYSE:GS) might have endured rough Q2 earnings compared to its competitors in the market, but investors were pleased to see both its top and bottom lines beat expectations. What else could one expect from one of America’s largest banks, as GS has been trading fairly well in recent months with attractive valuations.
Depending on whichever way you’d like GS to move, investors who are adding Goldman to their portfolios are looking more towards a long-term hold on its current position. Goldman Sachs is designed to make money regardless of macroeconomic conditions. This means that although the investment and banking giant saw banking fee revenue drop by 41%, its fixed income trading revenue was still up by more than 55%.
Bank of America
Investors were quite pleased with Bank of America’s (NYSE:BAC) second quarter performance, beating analysts' revenue expectations, as the bank posted revenue of more than $23.2 billion. Initially, analysts predicted $23.1 billion in revenue and $0.75 earnings per share (EPS), which came out at $0.80 EPS.
BAC shares are down roughly 24% this year, but many investors are still quite bullish over the bank's performance as inflation caused major headwinds for financial institutions.
For seasoned investors, BAC is perhaps a more reasonable purchase in current macro conditions, as it’s well-priced, and still heavily backed by both Warren Buffet and Berkshire Hathaway.
Wells Fargo
While Wells Fargo (NYSE:WFC) is still looking to shed its hefty dose of bad publicity caused by fraudulent activities, it hasn’t halted investor interest in the well-priced position of WFC.
Analysts were a bit discouraged by the bank’s first quarter performance, as earnings showed the bank seeing profits drop by 20.8% to $3.67 billion. Further predictions also didn’t meet analysts' expectations, with revenue closing at $17.59 billion, lower than the predicted $17.8 billion.
These aren’t the most promising figures to prove WFC's worth in the broader market, but investors are still looking to snag up Wells Fargo shares, as analysts have been increasing their price target for WFC by more than 40% this year. WFC brings a bit more volatility than other banking shares, but there’s still some potential left that investors can look to ride out.
Citigroup
Citigroup (NYSE:C) is perhaps one of the few banks that have been able to leverage the advantage of rising rates and soaring inflation, as Q2 performance was able to surpass analysts' expectations.
During post-earnings, shares of Citigroup rallied by more than 13%, the biggest in the bank’s post-earnings stock gain in more than 20 years.
Analysts estimated $1.68 EPS, but Citigroup came out on top with $2.19 EPS. Revenue was also higher than estimates, with Q2 revenue surpassing the $18.22 billion expected to $19.64 billion.
The bank has shown its resilience, even as the broader market has been sinking, and investors remain bearish.
The Bottom Line
It’s a scary thought to have right now, and investors are taking major risks if not recession-proofing their portfolios. Regardless of where the next few months may lead, it’s clear that banking shares could perhaps offer a safe haven if the economy suddenly turns sour.
It’s important to keep in mind that there are both good and bad sides to banking shares, no matter how well you think you may know the market. There’s increasing volatility presenting itself, which has only made it more challenging to navigate the tumultuous conditions.
Whether you’re a big supporter of banking shares or not, consider how these purchases could add value, and have the potential to grow in the long term.
