Financial stocks have been underperforming the broader S&P 500 index since the start of 2020. The most commonly tracked financial-sector ETF, the Financial Select Sector SPDR Fund, is up just 1.2 per cent throughout the first seven weeks of the year. Over the same time period, the SPDR S&P 500 ETF Trust is up 4.7 per cent.
In other words, investing in financial stocks so far is generating lower returns and investors would have been better off exposed to other sectors. Investors who insist on having some exposure to the finance sector should be selective and focus on names with clear catalysts for 2020 and beyond.
Why financial investors should be worried about the coronavirus
Tech giant Apple cautioned investors on February 18, 2020 about it not being able to hit its prior revenue guidance because of the coronavirus. So why is this more concerning for financial stocks? According to CNBC pundit Jim Cramer, Apple set off a chain of events that ultimately impact financial stocks the most.
See, Apple’s warning has investors questioning what other companies will be impacted by the virus. As soon as the number of companies issuing warnings increases from a few handfuls to many, investors will then shift their attention to preparing for a global economic slowdown. What’s next after a slowdown? A recession.
And during a recession, interest rates must come down to help support the economy. This is a worst-case outlook for financial stocks who thrive in a rising interest rate environment.
Financial stocks making major moves: Morgan Stanley buys E*Trade
Morgan Stanley reached an agreement on February, 2020 to acquire E*Trade, a financial services company and early pioneer in the online brokerage industry. As part of the $13 billion acquisition, E*Trade investors will receive 1.0432 Morgan Stanley shares for each E*Trade share held.
At first glance, some investors are questioning the logic behind the deal given what looks to be minimal overlap. Morgan Stanley is a Wall Street-based behemoth with swanky offices in every global financial hub. By comparison, E*Trade rose to fame in the very early 2000s through a series of commercials featuring dancing monkeys.
Trade Morgan Stanley – MS CFD
But the logic behind the deal is sound as Morgan Staley is paying to essentially acquire 5.2 million new customers and $360 billion in assets – all in one shot. Perhaps more important, E*Trade clients combine for more than $50 billion in consumer deposits which under Morgan Stanley’s umbrella provides much cheaper funding options, as opposed to more expensive fundings which are the norm for Wall Street firms.
Morgan Stanley does have some opportunity to upsell its new high net worth customers with advisory services they wouldn’t have considered before. The bank can also start selling its research products and services to millions of new customers. This also represents a “balance sheet light” and a more durable source of revenue for the years to come.
Some savvy investors could have predicted the acquisition which was foreshadowed in Morgan Stanley’s fourth quarter report. Among all of the bank’s divisions, the Wealth Management produced the largest pre-tax income at $1.2 billion. Perhaps the company was looking at its business and decided to focus on what’s hot.
Needless to say, the large-scale acquisition makes Morgan Stanley one of the bank stocks to watch in spring 2020.
J.P. Morgan crushed earnings
Few metrics matter more for financial stocks than size and scale. Among the universe of U.S. financial stocks, none are bigger than J.P. Morgan Chase with $2.7 trillion in assets. The mega-bank crushed its fourth quarter earnings report in early January and the company showed it is among the few hot bank stocks.
J.P. Morgan showed record revenue for a fourth quarter along with rising net income in each segment, except for Commercial Banking. The unit’s net income was down 9 per cent from the prior year on a 3 per cent decline in net revenue.
Overall, the company ended 2019 on a very solid note, highlighted by record full-year revenue and record net income.
Equally important, 2019 was a year of investment and growth to better position the company moving forward. The company noted it added 70 new consumer branches in 16 new markets and it became the first-ever U.S.-based bank to be approved for a majority-owned securities business in China.
Other often overlooked investments that are just as important to J.P. Morgan’s growth profile in 2020 and beyond include a focus on technology, especially artificial intelligence, cloud, digital, and payments.
“These actions will help us continue to grow and serve our clients going forward,” CEO Jamie Dimon said in the earnings report.
It’s hip to be Square
Far from a traditional financial stock that long-term investors have gotten used to, Square is among the fast-growing fintech stocks that need to be watched.
Square’s history traces back to 2009 when it provided a simple piece of hardware that allowed any merchant to accept credit card payments using their smartphone or tablet. Fast forward more than a decade and Square now has its hands in many different ancillary services, including a credit card that gives merchants instant access to their funds, for a fee of course.
Square has proven to be so far one of the best financial stocks, having gained more than 35 per cent in the first few weeks of the year. Part of the strong performance can be traced to a timely upgrade from Bank of America analyst Jason Kupferberg. According to the analyst, the Street is expecting Square to show a net revenue growth rate in 2020 in the low-30 per cent range but this is too low.
The research firm’s call on Square comes a few weeks ahead of the company’s March 18 analyst day presentation. At that time, the company could take the opportunity to present some new financial stocks news and its vision on how it will monetise an entire payment ecosystem that targets both merchants and buyers.
Square’s stock has seen better days as shares flirted with the $100 per share mark in 2018. But at a time when the market is ultra-focused on finding shares poised to retake old highs, Square is one of the few financial stocks that can satisfy existing shareholders and new ones.
Stay tuned to the latest financial news, which can drive stocks price movement.
Track the performance of the top financial stocks live and trade them with CFDs at Capital.com.
Ready to get started?