Making Money Made Easy: Three Reasons Bank Stocks Will Rally in 2018

Making Money Made Easy: Three Reasons Bank Stocks Will Rally in 2018

2018 is bound to be a blistering year for bank stocks. Such sentiments are being expressed across the board by leading economists, speculators, and investors. Foremost among the reasons for improved optimism is the current state of the US economy. For starters, US bourses are at record levels. At the time of writing, the following performance figures were noted:

• The Dow Jones Industrial Average is currently at 26,089.27 points, for a 1-year change of +31.73%
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• The S&P 500 index is currently trading at 2,802.25 points, for a 1-year change of +23.34%
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• The NASDAQ Composite Index is currently trading at 7,285.20 points with a 1-year improvement of +31.13%
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• The New York Stock Exchange Composite Index is currently trading at 13,344.64 points with a 1-year improvement of +19.19%.

If we narrow things down further, indices are benefiting from the business-friendly practices currently in place. Things like deregulation, comprehensive tax reform, and a policy of monetary tightening are going to positively impact the US banking sector in 2018. Each of these components is worthy of investigating, to determine how they will affect the financial sector, notably bank stocks.

Banks and Money

Banks are in the business of lending money. After the 2008/2009 global financial crisis, the Fed aggressively pursued monetary easing by cutting the interest rate and pumping hundreds of billions of dollars into the US economy. The USD weakened, and borrowing became cheaper. For banks, this was a difficult proposition. Fast-forward to 2018. Today, the federal funds rate (FFR) is currently standing at 1.25% – 1.50%. The Fed embarked on monetary tightening from December 2015. Since then, multiple rate hikes have taken place, and on each occasion bank stocks have improved incrementally.

2018 is slated to be another year of monetary tightening for the Fed. The next meeting of the Fed is January 31, 2018, but the CME Group does not forecast any changes to the FFR. For March 21, 2018, there is a 72.6% likelihood of another 25-base point rate hike in the region of 1.50% – 1.75%. By 2 May 2018, the probability of a rate hike remains above 70%. When the interest rate rises, banks benefit by being able to charge their clients more. This naturally boosts the profitability of banks on the stock markets.

The performance of leading US banks has also shown bullish tendencies of late, including:

• Bank of America Corporation (BAC) is currently trading at $31.28 per share with a market capitalization of $326.061 billion and a P/E ratio of 17.89. The 1-year target estimate price is $32.95 per share.
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• Wells Fargo & Company (WFC) is currently trading at $63.95 per share with a market capitalization of $314.906 billion and a P/E ratio of 15.60. The 1-year target estimate price is $65.81 per share.
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• The Goldman Sachs Group Inc. (GS) is currently trading at $251.34 per share with a market capitalization of $94.806 billion and a P/E ratio of 27.90. The 1-year target estimate price of GS is $266.04 per share.
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• Citigroup Inc. (C) is currently trading at $77.20 per share with a market capitalization of $204.117 billion. The 1-year target estimate price is $82.91 per share.

Leading online brokerage, Olsson Capital has witnessed a robust increase in the number of call options with financial stocks. Clients understand the implications of deregulation, comprehensive tax reform, and monetary tightening on bank stocks. This is considered the trifecta of elements that can boost the performance of bank stocks in the economy. The lull that took place in the aftermath of the global crisis is over, and banks are back to their primary business of lending money at higher interest rates. This will see profitability soar, especially with corporate tax rates being dropped to 21% come December 31, 2018.