Market Got You Nervous?
We at the RJR do not consider ourselves expert market prognosticators and don’t pretend to have the inside track when it comes to calling major market moves. We also do not invest in individual bank stocks or recommend specific companies. Rather, we analyze overall industry conditions and individual bank performance to come up with our assessment of the banking sector’s upside potential and downside risk, as well as which companies are overvalued or undervalued relative to their peers based on current and historical performance. One of the tools we use to identify potential market and industry sector trends is the RJR Indicator (RJRI). During the past 18 months or so that indicator has either been neutral or positive, indicating upside potential relative to the broader market. In fact, the RJRI only gave one negative signal during that time -- at the end of July just prior to the minor market sell-off. As the graphs show, during most of 2024 and into the first part of 2025 all banking sector categories (especially smaller institutions) as well as the KRE Banking Index outperformed the overall market by a significant amount.
However, our RJRI turned neutral at the beginning of the year (indicating that we expected the banking sector to perform consistent with the overall market) and just turned negative during the week of February 13. While there is considerable market uncertainty as the potential impact of the new Administration’s economic “policies” become clearer, we are urging caution, especially since the banking sector is influenced heavily by the overall economic and interest rate environment.
Are Attractive Yields Available?
What happens if the “Trump Bump” becomes the “Trump Dump”? Traditional market strategy would recommend hunkering down and moving into safe investments that provide steady and reliable income. This is particularly the case if the interest rate outlook calls for stable or declining rates. So, if one decides to adopt this strategy, are there opportunities within the banking sector to earn attractive yields while the overall market decides what to do? Unfortunately, the answer is not as many as there used to be. As the overall banking sector appreciated, yields declined significantly with the average yield for all the banks we cover now at 2.93% -- barely keeping up with inflation. So, not great. However, there are a few banks that have underperformed in terms of their stock performance that do provide acceptable returns. All of these banks except one – Associated (ASB) – did not participate in the most recent bank rally. Consequently, their current valuations now provide attractive yields and, if the market moves up, potential price appreciation. The good news is that three of these banks – Columbia (COLB), Regions (RF), and Atlantic Union (AUB) were all rated as high performers based on fourth quarter and year-end results. The charts below show seven banks with the highest current yields as well as their stock performance over the past few months. Each one of our top performing banks (indicated in green) is trading below both ours and consensus analyst target prices.
Information not Recommendations
As mentioned above, we do not invest in individual bank stocks or make recommendations on market timing or investment strategies. We provide information that hopefully can help inform individual investment decisions. As always, before making any investment decisions one should consult with a qualified and licensed investment advisor.
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