It’s no secret that the stock market has seen its share of upswings and downturns lately. Thanks to an influx of wild swings, it’s hard to know where to invest your money, especially as many alternative portfolio options, such as cryptocurrency, continue to invade traditional market sectors. Still, experts recommend sticking with banks and similar financial institutions if you’re unsure where to start.
The reason? While fads come and go, the foundation upon which this sector is built has remained relatively steady. Though financial stocks on the S&P 500 are down 0.8% year-to-date, the overall trend has been that even amid rocky market times, they’re reliable investments. Yet, not all banks are created equal and as such, it can be difficult to discern which ones to risk your money with. There are four areas to consider when making your decision, and recent news updates can affect it as well. Let’s take a look at where to start your research.
What Recent Tax Reform Means for the Banking Sector
A new tax regime has recently been implemented for banking corporations. Historically, banks have shelled out around 30% to 31% for taxes. After this new law, this will result in two major benefits. First, depending on the specific institution, the rate is lowered by around 8% to 10%. Still, major tax breaks including those centered on facilitating low-income housing opportunities, will be maintained. As such, the average tax break for many banks around the country will effectively be between 18% and 19%.
What does that mean for investors? In addition to their bottom line being healthier, banks can now perform more business and secure more loans. In other words, they’ll have more access to true money. From investing back into their business to spending more on employees, there are several ways they could utilize these funds. Ultimately though, the profit boost means it’s a healthy time to invest.
The Benefits of Uptrending Interest Rates
Historically, when an interest rate moves, it lasts for around 30 years or so. After rates reached a high in the late 190s, the last major shift occurred in a downturn lasting until around the middle of the 2010s.
Now, rates are changing again and the prospective appears to be upward. Due to a shrinking balance sheet, the Federal Reserve is again raising rates, with a forecast projected to last at least until the mid 2040s. Coupled with a recovering economy, this stands to benefit the banking sector, which has traditionally performed well in such an environment.
A New Order Established in Leadership
The Federal Reserve’s recent move concerning interest rates might be new, but it’s not surprising given that management has changed hands in the past year. It’s not the only banking agency getting a makeover, either. Organizations from the Securities and Exchange Commission to the Financial Stability Oversight Council have also seen executive adjustments, and for leaders within the banking sector, most of the moves offer an advantage. As older regimes are ousted, they’re being replaced with modernized ideals and a new way of doing business. When most of these agencies were established in the mid 1930s, they were rooted in the notion that banking institutions should be under the control of the federal government. Now, new teams are focused on easing up some of those government restrictions and putting more jurisdiction back into the hands of the banks themselves. Given that they remain within the broad restrictions set forth by the Dodd Frank legislation, the freedom they could be afforded in the near future is promising.
Advanced Technology on the Horizon
There’s no denying the proliferation of digital technology into virtually every industry sector, and the banking sector is no exception. While some may argue that banks have lagged in tech adoption, this trend is proving untrue, as most larger institutions are rapidly adopting innovative technology that’s changing the game from how backend systems operate to how customers and associates interact.
Take, for instance, the fact that Bank of America (NYSE: BAC) is the current leader in blockchain patents or that many institutions are banding together to create a form of digital currency akin to the cryptocurrency craze that’s taking the market by storm. For anyone who’s ever had to contact their bank before traveling out of country to make sure their credit cards still work, that runaround is also being eliminated as institutions can detect your location and open up access to your funds immediately. From mobile bill pay and virtual financial planning support to AI-driven credit checks, there’s no end in sight when it comes to how innovative banks can go if they choose, and that’s a promising investor prospect.
Wrapping Up: Bank Stocks are a Wise Bet, and Here’s Why
As they continue to progress, innovate and adapt, banking institutions remain promising investment bets. At a time when so many fledgling industries are promising big returns but ultimately leaving investors disappointed or worse, bank stocks are a steady bet with a foundation solid enough to weather any ebb or flow the market can produce.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.