Financial sector stocks have risen, but is this rally sustainable?

Financial sector stocks have risen, but is this rally sustainable?

U.S. banks face a variety of problems: slow economic growth that weakens loan demand, low interest rates that pressure investment returns, tighter regulation that adds to increasing costs, and rising social and political movements against the sector.  The industry faces significant headwinds in the near-to mid-term in this new reality.  Despite these issues financial sector stocks have risen over 13 percent since the start of the year.   Is this rally sustainable?  Here are the main topics that investors need to consider.

  • Limiting Exposure to Europe - The economic conditions in Europe may still have a major impact on banks in the United States throughout 2012. Thus, U.S. banks could be looking to take several steps to limit their exposure to potential lingering problems in Europe.  As demonstrated by the results of the Federal Reserve’s stress tests, U.S. banks have continued to shed European assets in order to boost their capital levels.  This “risk-off” process could continue as banks attempt to obtain the good graces of both regulators and their shareholders. 
  • New Regulations - Banks may continue to focus on implementing many of the fundamental provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III. The significant changes and additions to regulations on banks will require considerable adjustments to business plans, incurring large costs on banks in order to meet these requirements.  The main problem that banks will most likely continue to face is how to replace existing revenue streams.  As demonstrated by Bank of America’s debacle from last year, banks could start to experiment with extra costs on basic checking and savings accounts.
  • Strategic acquisitions – Strong banks may continue to take advantage of opportunities to gain competitive advantages, weeding out smaller banks that do not offer as many products or services as the larger banks. An alternative to some of these smaller banks failing is that larger banks could see opportunities to buy them.


*The opinions and forecasts expressed are for informational purposes only and may not actually come to pass.  This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan.  The representative does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions. 

*The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. An investor cannot invest directly in an index.
Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc. Armstrong Advisory Group and the Securities America companies are unaffiliated. 
March 2012

1 19 Mar 2012.