M2 BARRON’S July 12, 2021
peak growth are triggered by nearly every
data release. This past week a disappoint-
ing ISM services survey—it fell to 60.1 in
June from 64 in May, below forecasts for
63.5—seemed to trigger selling on Tuesday.
Never mind that a reading above 60 is still
very, very strong. Here’s a little secret:
There’s a good chance economic growth has
peaked, but that doesn’t have to signal the
end of a bull market.
Far from it. There have been seven eco-
nomic expansions since 1970, and the aver-
age one lasted 37 quarters past the strongest
quarter of gross-domestic-product growth,
writes Callie Bost, senior investment strate-
gist at Ally Invest. Only two saw peak
growth come during the final year of the
expansion, and one came during the 1980-81
recovery, which lasted only 12 months.
A recurrence is always a possibility, but
the odds favor more growth—even if it has
peaked. “It’s typical to see the economy
bounce back quickly after a recession as
spending and confidence comes back,” Bost
writes. “As the cycle ages, that energy can
wear off, and growth usually falls into a
more normal pace.”
The stock market’s rise likely will too.
There will be ups. There will be downs. And
there’s nothing wrong with that.
This Bank Stock Still Looks Cheap
Bank investors are hoping for something to
get excited about this coming week when
JPMorgan Chase , Goldman Sachs
Group , and others report second-quarter
results. They shouldn’t get their hopes up.
It’s not that there hasn’t been good news
for bank stocks. Just last month, the biggest
banks easily passed the Federal Reserve’s
annual stress tests, paving the way for them
to return capital to shareholders without
restrictions. They’ve also gotten a lift from
improving economic conditions, the release
of reserves set aside for bad loans that never
materialized, and continued trading and
deal-making activity. Banks have controlled
what they can control and have come out the
other side better for it.
But there’s one thing banks can’t con-
trol—bond yields. The SPDR S&P Bank
exchange-traded fund (ticker: KBE) gained
around 30% to start the year as the 10-year
yield climbed as high as 1.75%. The ETF has
given back about half its gains as the 10-year
yield dropped below 1.3% this past week.
While bank earnings should contain a lot of
good news, there may not be enough to get
the group moving higher. In fact, the oppo-
site might be true.
Banks have proven they have a solid
foundation, but the next leg of growth is
more uncertain. Few expect that trading
activity—which soared last year amid vola-
tile market conditions—will match last year’s
torrid pace. Across the sector, second-quar-
ter trading revenue likely declined by
roughly 30% year over year. Expectations of
reserve releases and capital return to share-
holders have already been priced into the
shares. As for loan growth, expectations are
weak as loan activity has likely been muted.
Bank stocks aren’t nearly as cheap as they
were a year ago, when many were trading
below tangible book value, but compared
with the broad market, they still look cheap.
The SPDR S&P Bank ETF currently trades
at 11.1 times 12-month forward earnings,
while the S&P 500 trades at 21.6 times.
Against this backdrop, with banks strong
but perhaps not as exciting and certainly not
as cheap, few are as cheap as Citigroup (C),
which trades at just 0.9 times tangible book
and offers a 3% yield after falling 13% over
the past month. Analysts surveyed by Fact-
Set expect that Citigroup will earn $1.99 per
share—roughly a fourfold increase from the
challenging year-ago quarter.
Barron’s highlighted Citigroup earlier this
year just as Jane Fraser was poised to be-
come CEO. Prior to Fraser claiming the top
spot, the bank was hit with a consent order
by regulators for weaknesses in its internal
controls. While there has been some analyst
Vital Signs
Friday's Week's Week's
Close Change %Chg.DJ Industrials 34870.16 +83.81 +0.24DJ Transportation 14842.77 -193.46 -1.29DJ Utilities 894.20 +8.42 +0.95DJ 65 Stocks 11490.90 -9.37 -0.08DJ US Market 1099.43 +4.01 +0.37NYSE Comp. 16633.30 -41.55 -0.25NYSE Amer Comp. 3124.88 -72.68 -2.27S&P 500 4369.55 +17.21 +0.40S&P MidCap 2706.42 -3.15 -0.12S&P SmallCap 1359.58 -10.10 -0.74Nasdaq 14701.92 +62.59 +0.43Value Line (arith.) 9671.90 -61.27 -0.63Russell 2000 2280.00 -25.76 -1.12DJ US TSM Float 45491.12 +112.98 +0.25LastWeek Week EarlierNYSEAdvances 1,488 1,757Declines 1,977 1,734Unchanged 93 74New Highs 380 497New Lows 90 58Av Daily Vol (mil) 4,093.7 3,837.4Dollar(Finex spot index) 92.10 92.23T-Bond(CBT nearby futures) 162-200 160-290Crude Oil(NYM light sweet crude) 74.56 75.16Inflation KR-CRB(Futures Price Index) 211.80 214.95Gold(CMX nearby futures) 1810.00 1782.6004-IB21-1458
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