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Financial stocks, measured by the SPDR Financials ETF (NYSE :), have compiled a decent 2019, which increases by approximately 29.5% compared to the SPDR S&P 500 ETF (NYSE 🙂 profit of around 29.2%. However, the group still lagged behind in sectors such as Semiconductors, Technology and Biotechnology. It seems that this may change in 2020, with financial shares possibly leading the way.
Returns at the long end of the curve have been rising since the end of August and that has led to spreads that are growing. The two most important ingredients that can help to increase the turnover and profit of banks in 2020. Meanwhile, expectations for large bank stocks seem low in the new year, with analysts looking for subdued revenue growth. However, the technical chart suggests that the new year may be anything but muted and suggests that there are higher prices for the sector.
Rates rise, spread more widely
The interest rates at the end of the yield curve have risen since the end of August, with an interest rate of 1.94% to a lowest point of around 1.45%. However, the prices at the shorter end of the yield curve have not risen that strongly. For example, the US yield has risen from around 1.4% to 1.63%. This has made it possible for the between 10-year interest rate and 2-year interest rate to rise to 27 basis points from negative five basis points in the summer months. The higher rates and wider spreads can have a positive influence on the net interest income for the banks, which increases sales and profit.
10-2 Year Treasury Yield Spread
The expectation for growth is low in 2020
The expectations for the banks seem low on the road to 2020, with analysts not looking for much sales growth from JPMorgan Chase & Co. (NYSE :), Bank of America Corp. (NYSE 🙂 or Citigroup Inc. (NYSE :). Currently, consensus analyst estimates do not suggest revenue growth for banks such as JPMorgan and Bank of America in 2020, with a revenue forecast of $ 115.1 billion for JPMorgan and $ 91.6 billion for Bank of America. Meanwhile, revenue for Citigroup is expected to increase by 1.6% to $ 75 billion in 2020. If revenue continues to rise and spreads increase, banks may see revenue and profit revisions, making estimates in 2020 higher may fail, giving stock prices a meaningful boost.
Technical strength
The technical chart for the XLF ETF also shows that the group is at the highest price in more than a decade, going back to 2008 at $ 31. If the ETF were to rise above that ten-year period of resistance, it could be ready for a big step higher. With a projection of the ETF increase from November 2016 to January 2018, as a guide, the ETF could rise to around $ 36.90, a jump of around 20% over the share price of around $ 30.90 at December 26.
The economy will have to improve
Much will have to happen to the US economy to make investors optimistic enough to further raise interest rates and to raise bank shares. The economy will have to show strong employment trends, including rising wages. Meanwhile, growth will have to accelerate from the current low growth rate of 2%.
If everything goes according to plan and the economy improves and yields rise, then 2020 could be a big year for bank shares. It would also enable them to free themselves from a prolonged recession. It means that the payout can be substantial if everything is in line.
