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 Inc. 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.
Three Actions Items
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
Biography
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
Keywords/Labels
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
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