Banks: Wall Street Putting Its Money Where Its Money Is

2021 has already been a fickle year for the big banks. The group of JP Morgan, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, and Morgan Stanley mostly reported Q4 earnings and revenue above consensus analyst estimates, keeping with the long-term trend.

Source: Banks: Wall Street Putting Its Money Where Its Money Is

This time around, only Bank of America, Wells Fargo, and Citigroup came in below revenue estimates—and only just so.

And yet, followers of the financials know what usually happens next: the banks show weakness.

So while each of the banks is still outperforming the S&P 500 for the year, they are all trading down since their reports. It’s a familiar refrain for followers of the financials, who have come to expect earnings to be a “buy the rumor, sell the news” event.

Unsurprisingly, this short-term rotation has benefitted financial bulls.

The Daily Financial Bear 3X Shares (FAZ) is down almost 19% over the last 30 days. Likewise, the Daily Financial Bull 3X Shares (FAS) is up about the same amount in this time period.

Data Source: Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

Renewed Interest in Regionals

Moving down the market cap ladder, the action in the regional banks has dwarfed that of its national counterparts.

Just like the big banks, most regional banks have reported earnings beats for Q4, including First Republic Bank, PNC Financial, and Citizens Financial Group. But while the fundamental story between the two groups is similar, the trading action is not.

The Direxion Daily Regional Banks Bull 3X Shares (DPST) is up 128% over the last three months, and year-to-date has taken in over $28 million in inflows.

Data Source: Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

Regional banks’ performance can again be chalked up to increased account activity, with PNC reporting strong deposits and, like its larger counterparts, additional capital that was previously set aside for potential loan loss.

The enthusiasm represents a decisive change in fortune for the regional banks, which, even more so than the big banks, drastically lagged the market through the bulk of 2020. Of course, these smaller financials also carry the same risk of a default wave as the big banks. What’s more, revenue among these smaller institutions is also handicapped by the current low interest rate environment that diminishes their ability to generate revenue through lending or owning rate-sensitive assets.

Big Picture

That question of interest rates, as well as the larger question about the current national macroeconomic picture, will likely determine how long this bank rally may last.

Currently, the banks seem to be in relatively healthy financial condition, all things considered. Loan losses don’t appear to be as bad as expected, and several even mentioned resuming buybacks.

So, despite Wall Street’s optimism (what some would call overly optimistic) over the past six months, its bullishness on the banking sector is seemingly on solid footing.

Two trading weeks into 2021, there’s only one thing that’s certain. Whether you’re a bull or a bear, Direxion is with you. Our leveraged ETFs are powerful tools built to help you:

• Magnify your short-term perspective with daily 2X and 3X leverage
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