Unemployment numbers reached a record low in September, dropping to 3.7% compared with August’s 3.9%, the lowest since 1969. While the non-farm payrolls data reflected additions of 134,000 jobs in the month, much lower than the 185,000 job increases analysts anticipated, it primarily reflects a one-time impact owing to people being away from work due to Hurricane Florence.
As a result, the economy seems to be in a good shape currently. Moreover, while the average hourly earnings grew 2.8% in the month compared with 2.9% in August, it still presents a good case to be bullish on the economy’s current state of affairs. Also, data for July and August was revised upward to reflect that an 87,000 additional jobs were created than previously reported.
Hence, the steady rise in numbers suggests a relatively moderate inflation outlook. This could, in turn, help the Federal Reserve to stay on track with its plan to gradually hike interest rates, in order to bring the rates closer to pre-crisis levels. Despite trade war worries keeping investors glued to their desktops, President Trump’s tax cuts are contributing to economic growth and therefore allowing policymakers to stay on track with their rate hikes.
Owing to the latest data point release, the benchmark 10-year Treasury yield rose to a seven-year high of 3.246%, as analysts across the street bet on higher interest rates. Moreover, after increasing rates for the third time this year, certain Fed forecasts expect further hikes to take the policy rate to 3.1% by the end of 2019.
Given the current market landscape, bank stocks seem to be an attractive proposition. A rising yield is mostly seen as a positive for banking stocks, primarily because as the spread between what they pay and what they charge increases, banks witness a boost to their profit margins.
Shares of all banking majors have seen a northward march the past few days, as markets reacted to the rate hike and further rate increase expectations. While the last week of September saw banking stocks slide, shares of JPMorgan Chase & Co. (NYSE:JPM), Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) have all pared some of their earlier losses since Sept. 26, when the Fed hiked rates to reflect the now bullish industry scenario.
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Moreover, banks are due to post their earnings results for the third quarter soon. The street is quite bullish on expected numbers for the sector leaders discussed above.
Coming to valuation numbers for these stocks, Citi currently floats a forward price to earnings ratio of 9.75, JPMorgan’s statistic stands at 11.64 and Bank of America’s at 10.67, as compared to the industry median of 13.40. Also, the forward price to earnings ratio for Morgan Stanley stands at 9.27 currently, compared with the industry median of 17.89, considering the fact that Morgan Stanley falls in the Global Capital Markets category compared to its peers in the Global Banks category.
All told, the economy seems to be performing well currently. With unemployment numbers at a record low and wages growing somewhat steadily, higher interest rates aren’t too far. Hence, bank stocks are one sector investors should closely monitor.
Disclosure: I do not own any of the stocks mentioned.