The Fed To Drive Bank Of America, Citigroup, JPMorgan And Financials Higher

Chris B Murphy profile picture
Chris B Murphy
3.66K Followers

Summary

  • Historically, as yields have risen, so too have bank stocks.
  • We're already seeing moves higher in financials as a result of anticipation of a Fed rate hike.
  • However, it's the balance sheet reduction that'll likely drive banks higher in the medium to long-term.

With the Fed meeting this week, a rate hike is not likely, but the economic outlook, the dot plot, and any Fed speak on the timeline for reducing the Fed's massive $4.5 trillion should be important in determining the medium to long-term moves in bank stocks. Following the meeting, the Fed will release their updated economic projections and should provide insight as to the central bank's next steps.

We're starting to see the market anticipate a taper, albeit a gradual taper as the 10-year yield has begun to nudge higher again.

The 10-year yield and bank stocks:

The 10-year yield is jumping higher on the back of expectations of Fed hikes and a balance sheet reduction. If anyone wanted proof that Fed action can impact the yield curve, the chart below will help clarify the correlation.

Although the 10-year is typically driven by long-term economic growth and inflation expectations, a bullish view of the economy by the Fed should translate into a higher Fed funds rate and a Fed taper. In other words, if the Fed is hiking and tapering, it means that Fed policy makers believe the economy is likely to grow in the medium to long-term.

Since higher growth leads to more lending and typically higher yields, bank stocks will likely be the biggest winners going into next year.

Currently, the anticipation of a Fed taper has already begun to move banks higher. Bank of America Corporation (NYSE:BAC) is up over 8%, JPMorgan Chase & Co. (NYSE:JPM) is up over 5.5% and Citigroup Inc. (NYSE:C) almost 8% since September 7th. Even Wells Fargo Corporation (WFC) bounced back by (+7%) in the past two weeks despite the negative press surrounding the ongoing sales scandal.

If we're seeing these type of gains in bank stocks today with the 10-year yield

This article was written by

Chris B Murphy profile picture
3.66K Followers
Hello. I'm a financial writer/blogger & market risk analyst with 15 years in the financial services industry including over 10 years on trading desks of two major banks. --------------------------------------------------------------------------------------------------------------------- My Top-Down meets Bottom-Up Approach to financial analysis includes: ----------------------------------------------------------------------------------------- How Macro Trends & Economic Indicators, Bond yields, Capital flows, & The Fed - Drive Sectors & ultimately Individual Stocks. - Financial analysis of Bank stocks, Commodities, Industrials, & Tech. - Former currency risk advisor to Corporates, with Options and risk policy experience.- Published Work includes: Financial analysis (Investopedia); - Retirement Income (RetirementIncomeAnalyst.com) & Wealth Management Firms. - Hold an Economics degree with a concentration in Finance (University of Rhode Island).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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