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US bank stocks have fallen to an all-time low compared with the blue-chip S&P 500 index, as demand for big-name technology stocks and the fallout from the banking crisis in March deter investors.
The relative performance of the S&P 500 banks index compared with the broader benchmark is at its weakest since the bank-specific measure began in 1989.
This year the industry impact of the failure of Silicon Valley Bank and of other smaller lenders has more than offset any upside from higher interest rates. It shows also how banks have failed to recover ground lost following the 2008 financial crisis when waves of new regulation hit returns already squeezed by super-loose monetary policy.
Lenders are now also facing further regulations under the so-called Basel III capital rules, which JPMorgan boss Jamie Dimon in September warned risked making bank stocks uninvestable.
“Do [regulators] want banks ever to be investable again?” Dimon said of the proposed rules at an industry conference. “I wouldn’t be a big buyer of banks . . . I’d be no better than equal weight.”
So far this year, the S&P banks index is down about 12 per cent, while the benchmark S&P 500 has risen more than 13 per cent. An index of regional back stocks has lost almost a quarter of its value.
Rising interest rates are usually helpful to banks, allowing them to increase profits by widening the margin between what they charge for loans and their own borrowing costs.
But the speed of the rate rises since early last year has so far done more damage to the bonds held on their balance sheets than any benefit from higher lending income.
However, Bank of America strategists said any upturn in the bank index’s relative performance could signal a broader shift in investor thinking.
“Banks finance roughly 35 to 40 per cent of the US economy [but they] are seeing their valuations trade at a very steep discount relative to the broad equity market, which is the most concentrated it has been since the internet bubble,” said Elyas Galou, strategist at BofA.
The bank predicts a long-term shift in investors’ preference, from their current appetite for technology and growth stocks to a new focus on value investing and greater interest in banks, energy stocks and commodities.
“Because we believe this is an inflationary cycle driven by profound secular shifts in society, we think the next move in markets will see a transition,” he added. “Banks will benefit post the next recession.”
Using a precursor to the S&P banks index, BofA calculated banks’ relative underperformance was the worst since that measure began in 1941.