Financials look likely to survive, but that doesn’t make their shares a good deal
As U.S. stocks turned volatile this month, big bank shares got especially wild. The Dow Jones U.S. Financials Index plunged 17% in August through the middle of last week before rebounding 8% by the close of trading Monday. During the same stretch, the Dow Jones Industrial Average lost 12% and gained 7%.
The bounce suggests investors don’t expect a 2008-style collapse of the financial system. On that point, there’s reason for optimism, but stability alone doesn’t make the sector a good deal. Banks face two longer-term risks. The first is that they won’t be able to grow. The second is that their importance within the economy may shrink.
The good news: The financial system has “more equity, more capital, stronger liquidity buffers and less leverage” than it did when Lehman Brothers collapsed, according to a recent research note from the banking trade group Securities Industry and Financial Markets Association (SIFMA). CreditSights, a research firm, agrees. Most big banks and brokers have “strong to very strong” liquidity, which would allow them to deal with a short-term emergency, it wrote Thursday in a note to clients.
Survival and growth are different things, however. Last week, with stocks plummeting and banks among the worst performers, JP Morgan chief executive Jamie Dimon offered CNBC viewers a shot of cheer. “[There’s] a lot of uncertainty in the world out there, but we will still open branches tomorrow and hire bankers tomorrow and create clients tomorrow,” he said. However, just a week earlier, his chief economist lowered the firm’s third-quarter forecast for gross domestic product growth to a meager 1.5%.
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