Why these investors love bank stocks

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A report on the stocks and funds that are popular among top-performing investment newsletters.

Banks currently are the industry group that is most popular with the top-performing newsletters that my auditing firm monitors.

In recent years, in fact, higher rates have hurt bank profits just as much as they have helped. This is evident from the accompanying chart, which plots the trailing 10-year correlation coefficient between bank stocks’ performance and interest-rate changes. A high coefficient is consistent with the conventional wisdom, while a coefficient near zero means that higher rates are neither positive nor negative for bank stock returns.

So when rates rise, what banks earn from higher margins between rates on deposits and loans is largely offset by losses on their bondholdings — and vice versa. A bet on bank stocks therefore is not a bet on the interest-rate trend, but on other factors.

 

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