Bank Stocks Might Not Be as Cheap as They Appear
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What quick market headlines and policy stories set the stage for this episode?
Here's your money briefing. I'm J.R. Whalen at The Wall Street Journal in New York. The big bank stocks look pretty cheap these days, but don't throw your money at that corner of the market just yet. In a moment, we'll hear from a hurt-on-the-street columnist who says the big banks need to take a heavy dose of a reality check before we get a clear picture of their worth. First, some money and market news you should know.
How would a $15 federal minimum wage affect jobs and worker pay, according to the CBO?
The nonpartisan Congressional Budget Office has determined that raising the federal minimum wage to $15 an hour would cost 1.3 million Americans their jobs, but at the same time would provide a raise for 17 million workers. The federal minimum wage is currently $7.25 an hour. Next week, a vote is planned in the House that would gradually lift the pay floor to $15 an hour by 2024. The study from the budget office looked at an average work week in 2025. A $15 an hour minimum wage would boost the pay of 17 million workers who would otherwise earn less than $15 per hour. It could also possibly lift the pay of another 10 million workers who otherwise would earn slightly more than $15 an hour. and raising the federal minimum wage to that level would lift 1.3 million Americans out of poverty.
And the McDonald's fast food chain is under increasing pressure to do away with the plastic toys included in its Happy Meals. A petition in Britain calling for the move has garnered more than 325,000 signatures, which also targets Burger King. The campaign sheds light on how the movement against plastic has moved from single-use products like straws and cups to items that many see as unnecessary.
Why are fast-food chains facing pressure to remove plastic toys from Happy Meals?
The fast food chains say they're working on offering alternatives to plastic. Many toys, including those in Happy Meals, usually cannot be recycled because they're made of multiple kinds of plastic or plastic mixed with other materials. And parents say those toys often just wind up in the trash.
If you look around the stock market to find places to invest cash, the bank stocks might look fairly inexpensive, trading at just 9.4 times estimates for 2020 earnings. But that's not the full story. Let's bring in Wall Street Journal Heard on the Street columnist Aaron Back to look beyond the numbers. So, Aaron, on the surface, the big banks look like very attractive investments.
Yeah, that's right.
How cheap do big bank stocks look based on forward earnings multiples?
As you said, they're trading at quite a low multiple of forward earnings at the moment. They've also just announced big increases in their buybacks and dividends after they all just passed the stress tests that the Fed does every year. So they look like attractively priced investments right now, at least initially.
But the markets and the overall economy, they've been on such a tear. Is there a legitimate fear that the big banks have not priced in any chance of there being some any bad news on the horizon?
I mean, the question is, is, first of all, the economic boom going to go on or are we on the verge of some kind of downturn? And second of all, how much is a negative scenario like a downturn priced into that cheap valuation? That's really the question you have to ask yourself. My view is that if a downturn does come, it is not priced in despite how cheap they look. And that's why I would be a little bit cautious with the banks right now.
What reasons does Aaron Back give for caution despite low bank valuations?
And then there's a possibility also of the Fed lowering interest rates. And you say in your Herd on the Street column, the big banks have definitely not priced that in as a possibility.
Right. That's correct. So when we say that the banks are cheap based on estimates of forward earnings, we then have to go and look at what's in those estimates. So what I did in my column today is I went and looked at, for example, how much are analysts expecting interest rates to come down. And between now and 2020 – analysts are really only expecting the margin that banks earn on their loans to go down by 0.04 percentage points. So they're expecting a very small decline in the interest income of these banks. And I think that if the market action that we've seen recently with the rates on treasury yields coming down continues, and if the Fed goes and cuts rates, I think you could see these banks making a lot less than analysts currently expect.
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Chapters
7 chapters
1
What quick market headlines and policy stories set the stage for this episode?
0:05–0:27
2
How would a $15 federal minimum wage affect jobs and worker pay, according to the CBO?
0:27–1:47
3
Why are fast-food chains facing pressure to remove plastic toys from Happy Meals?
1:47–2:35
4
How cheap do big bank stocks look based on forward earnings multiples?
2:35–3:32
5
What reasons does Aaron Back give for caution despite low bank valuations?
3:32–5:32
6
How could falling interest rates and rising net charge-offs hurt bank profits?
5:32–6:19
7
Why do bond-market signals like an inverted yield curve suggest recession risks for banks?
6:19–6:41
Speakers
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