Wednesday, May 11, 2016
Trends on The Street: Big Banks and Oil
The performance of dismal investment banks and oil prices over the past month hold some troubling implications for the way markets are looking to shape up in the remainder of this year. How major financial players respond will crucial to their either the continuing underperformance or banks or their turn around.
As an undergraduate student at Northwestern University studying Economics with minors in Psychology and a certificate in Integrated Marketing Communications, I provided two articles below that I think will be informative to financial professionals and enthusiasts.
The first article written by two Wall Street Journal financial reporters takes a look into the recent earnings reports of Goldman Sachs Inc. and the related implications to other banks on the Street. Goldman Sachs Group reported sharply weaker first quarter results, raising investor fears that there are fundamental problems in the Wall Street money-making machine. Profits for most of the largest U.S. banks were down. However, on top of this five of the six also posted shrinking revenue—led by a 40% drop at Goldman.
The performance has raised tough questions from analysts and investors about the road ahead for the firms and their ability to generate the level of business they have in the past. Banks’ trading businesses have deeper challenges that may not go away with a pickup in economic activity: Goldman and other banks have been discouraged from taking big trading risks by tougher capital rules and the Volcker rule, which limited bets with banks’ own money as part of the 2010 Dodd-Frank financial legislation. In order to bounce back many banks will have to implement new and extreme cost cutting measures to fight shrinking revenues.
This second article delves into the correlation between oil prices and stocks in the current year. Not so long ago, the easiest way to figure out where U.S. stocks were headed was to look at oil. Remember when what was bad for oil was bad for stocks, and vice versa? Well, that isn’t really true anymore. For investors, this indicates the adverse feedback loops that were rattling markets earlier this year have, for the moment, been broken. A good thing—though it may also make the Federal Reserve more comfortable about raising rates.
Indeed, oil and stock prices have moved in the same direction on just 11 of the past 20 trading days. And the correlation between daily moves in the crude contract and the S&P has fallen to 0.28. The Fed, wary of what happened earlier this year, is in no rush to tighten; the chances of a rate increase at its meeting next week are next to nil. But with the fading of the extreme correlations between oil, stocks and other market instruments, it has one less reason not to go in June.
So at the end of the day what does this mean for investors? Here are three item actions for investors with stakes in financials and oil:
1) Be cautious in the investment of the stocks of big banks
o Banks’ trading businesses have deeper challenges that may not go away with a pickup in economic activity
§ discouraged from taking big trading risks by tougher capital rules and the Volcker rule
o Upside: Despite tough first quarter, all six big U.S. banks beat earnings estimates for the first time since 2013, according to data from Thomson Reuters.
§ Banks including Goldman said trading conditions had improved in March and April, giving some hope to investors who had bet on bank shares of late.
2) Do not have too much anxiety about the outlook of U.S. and world economies during the remainder of 2016
o Isn’t as grim as many feared when stocks hit their low for the year
3) Do not make investments that play off the correlation between oil prices and stock prices
o Correlation has proven to be minimal at best as of late despite movements in late 2015 and early 2016
Tunde Kelani is a graduate of Northwestern University with a B.A. Economics, minor in Psychology and an Integrated Marketing Communications certificate from the Medill School of Journalism. He will being working for Goldman Sachs as a Securities Analyst in July 2016. LinkedIn: https://www.linkedin.com/in/tundekelani
Article: Justin Baer, Peter Rudegeair, Justin Lahart, Wall Street Journal, Banks, Oil
Topics/Industries: Finance, Financials, Big Banks, Oil, Markets, Interest Rates, The Fed, Stock prices, S&P
Target Market: Finance Professionals, Investors, Finance enthusiasts