Breakout

As Goes the Economy, So Go the Bank Stocks: Bove

Breakout

Ask investors if they think the stock market is overdue for a correction or worse, and you'll likely find a sizable sampling that think it's not only possible, but likely. Ask those same investors if they think we are going to slip back into recession again and you're apt to hear the proverbial crickets.

Even the most pessimistic of pessimists have come to admit that the economy has some traction and, at the very least, appears to have stabilized.

For Dick Bove, head of financial sector research at Rafferty Capital Markets, the question of whether or not to buy into banks now is as simple as making an up or down call on the economy.

"If the economy does well, they'll do well. If the economy does poorly, they do horribly," the veteran analyst says in the attached video.

And since he thinks the economy will continue to do well for the next couple years, it only makes sense that the banks will track that ascent.

"As a result, my belief is that bank earnings will continue to rise, bank book values will go up, and bank stocks will continue to go higher," he says.

For the record, the Financial Sector SPDR (XLF) and the KBW Bank Index (^BKX) are almost a 2:1 outperformance over the S&P 500 for past year, rising 47% and 28% respectively.

And while many traders have been consumed with the timing and impact of if and when the Fed starts scaling back its support, Bove's research suggests otherwise.

"What I discovered is essentially that the Fed has put so much money into the financial system, that there's $1.7 trillion right now of net free reserves at the Federal Reserve," he says, meaning there's $1.7 trillion that has yet to be spent by the banks. "The Fed can taper all it wants, there's still a staggering amount of money that needs to come into the economy from the banking system, so I don't think the tapering will mean anything."

When asked about rising rate risk he has similar disdain and confidence in his picks.

"It's hard for people to understand, but the higher interest rates go, the more houses you sell," he explains, adding that the same is true for cars and loans in general.

"When interest rates are going up, it's because employment is going up and the economy is going up and people are buying more things," he declares, adding that any modest rise in interest rates is unlikely to slow down the economy.

It's not like this is a new development since Bove points out that bank earnings have been growing for 14 consecutive quarters.

"Banks are getting profits from everywhere. Bad loans are going down. They are lending more money in the commercial sector. They are seeing the cost of running the business go down."

In short, he says the bank story still has a long way to go.

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