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During this year’s first five trading days, bank stocks jumped 5.4 percent, their best start to a year since 2010, while the Standard & Poor’s 500 index retreated 1.9 percent.
Share prices of Citizens Financial Group, M&T Bank Corp., and Regions Financial Corp. all shot up about 15 percent on the week.
The spike followed news that the U.S. Federal Reserve may raise interest rates as soon as March.
By the following Monday, 10 January, the 10-year Treasury note’s yield had strengthened to 1.779 percent, the most in two years.
Investors are betting that the U.S. Federal Reserve’s looming interest rate hikes will lift bank earnings and profits, giving those stocks the cachet that tech shares had during the height of the COVID War.
The KBW NASDAQ Bank Index jumped 10 percent during the first week of the year, its best weekly percentage gain since November 2020. In the same week, the tech-laden NASDAQ slumped 4.5 percent, its worst week since March 2020.
“The backdrop for financial stocks is very favorable,” Greg McBride, Bankrate.com’s chief financial analyst, said in a Wall Street Journal interview.
“Rising interest rates can boost bank margins and a strong economy can lead to increased borrowing,” he said.
Some Fed officials foresee three interest-rate increases this year, although Goldman Sachs and other observers expect four.
When the Fed raises its rates, banks also usually follow suit with rates on credit cards, variable-rate mortgages, and other loans.
Banks tend to raise interest rates they charge for loans before lifting the rates they pay on deposits, putting extra padding in their bottom lines. They also tend to raise rates for some commercial and real estate loans as long-term treasury yields rise.
“The spread between what you charge on loans relative to what you pay on deposits will begin to widen as rates rise,” banking analyst Jason Goldberg at Barclays told the WSJ.
TREND FORECAST: This is only part of the bank story. As evidenced by declines in JP Morgan and Goldman Sachs stocks, the huge profits they made with all the Bigs Getting Bigger deals they made during the COVID War, are starting to ebb.
And while banks will earn more from loans as interest rates rise, there will be a slowdown in real estate, consumer and business loans as the economy descends into Dragflation.
And, the higher interest rates go, and the slower the economy grows, there will be growing debt defaults which will also deflate bank’s profitability.
Also, many banks, as we have noted, are heavily invested in commercial real estate sectors and also hold massive loans from commercial real estate investors. Thus, the deeper those sectors fall, so too will the banks sink deeper in debt.
Indeed, with office occupancy rates tanking, as we reported, the Banksters and private equity group gangs were among the first to push for their work-at-home employees to return to the office.