Today’s market is more treacherous than ever; this is not your father’s business cycle – or even your grandfather’s; it’s a new battlefield out there. Previously, when uncertainty entered the markets, it took weeks and sometimes months for the information to dissipate and begin to move assets accordingly; today it’s almost instant.
But don’t worry. MarketBeat has you covered by monitoring markets and developments daily so you can tune in to some of the noise. Today, as earnings season kicks off, big banks are voting on where they think the economy — and the stock market — might be headed next.
Two of the biggest names have released their quarterly set of results, and what’s inside will reveal trends that will help you navigate today’s market environment.
Information advantage
at a corner Bank of America (NYSE: BAC) stores consumer and commercial side information. At the same time, The Goldman Sachs Group (NYSE: GS) will tell you about the investment side of things. Combining both perspectives can help you in your personal financial decisions as well as investment decisions.
Starting with some perspective, understanding how these two banks have performed year-to-date can begin to give you an idea of the economic outlook today. Shares of Bank of America and Goldman Sachs are down this year, down 18% and 12%, respectively.
When you zoom in on a one-month perspective that includes price action from recent earnings, the story begins to shape itself. Bank of America fell 4%, while Goldman fell 11% in the past month. Conclusion?
The everyday consumer who banks with brand names like BoA (Bank of America) gets a better deal in this market. If you look at BoA CD rates, you’ll notice that a 7-37 month CD will pay you up to 5.0% APR.
Given that virtually risk-free bonds are offering 4.9% yield today, that return is starting to look more attractive. These proposals attract higher consumer deposits and boost NII (net interest income), a win-win situation thanks to the Fed keeping rates higher for longer.
At Goldman, things seem a little duller. Earnings per share were down a whopping 33% year-over-year. Since this bank relies more on M&A (mergers and acquisitions) activity, which hardly happens in a high interest rate environment, a down cycle is almost inevitable.
Consequences
Earnings at BoA show that trading activities delivered a 10% increase in revenue, translation? Markets have been more volatile and are likely to remain volatile for longer. Therefore, trading (when done right) can be the game of the day.
Let’s say trading isn’t for you, but you’re still looking for a reliable way to navigate the market. In that case, these two giants have a solution.
They always say follow the money, right? Understanding where the “masters of the universe” are making their money can tell you where to follow them.
Goldman suffered heavy losses in their real estate division, where their investments collapsed. For you, this means building a potentially discounted portfolio of REITs (real estate investment trusts) with yield and upside; their trash becomes your treasure.
Within their wealth management division, where capital flows can be the publication of where they advise clients to go, spits out another helpful hint. The $7 billion in inflows were “predominantly in fixed income assets” and represented 38% of the product mix.
Liquid products required an inflow of $11 billion, accounting for 29% of the total mix. Equities (inventories) shrank by $52 billion and represent just 23% of the mix. Did you get the message? Ditch the overvalued stocks and start chasing high dividend stocks or pure bonds.
In BoA, things looked similar. The 6% revenue increase came from higher trading activity in credit and mortgage products, a form of yield (fixed income). Fees from this department totaled $8.9 billion, while equity fees accounted for only $4.9 billion.
The bank’s bad debt increased from $869 million to $931 million, driven by higher credit card losses, despite having an average FICO score of 774. That could be a sign of the times for the American consumer, who is getting into trouble, which leads to an opportunity here.
Now look, both camps have voted for the same strategy, and your best bet to survive today’s storm is to follow them. If these masters are giving up stocks, it’s your job to pick up only the best.
They also chase yield, so your best bet is to use MarketBeat’s stock screener to look for dividend stocks that can beat the risk-free CDs offered by banks. These guys have been around the block and are here to tell you where the bumps are.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.