Bank stocks may climb over the next few months following the Federal Reserve’s decision Wednesday to cut its key overnight borrowing rate by a quarter percentage point. According to data from Wells Fargo, banks have rallied heading into the Fed’s first cut in the last six rate-cutting cycles, then declined 6% over the course of the next seven to eight trading days. But in three cycles where a soft landing was achieved – namely, 1995, 1998 and 2019 before the Covid pandemic – bank stocks rallied, on average, 21% from their post-cut low. In contrast, in the last three rate-cutting cycles leading up to a recession — in 1989, 2001 and 2007 — bank stocks saw modest declines after the first Fed rate cut, but continued to weaken for the remainder of the quarter after. “Many still view banks akin to cyclicals that are helped by rate cuts,” Wells Fargo’s long-time bank analyst Mike Mayo wrote in a report Wednesday. “Rate cuts with no recession (1995, 1998, 2019) result in bank stocks rallying.” To be sure, Mayo cautioned investors not to stay in the trade “too long,” saying that although banks can outperform after the central bank’s first cut, all of that historical outperformance came in the first three months. “In 7 out of 8 rate-cut cycles, banks underperformed the S & P 500 in the period from 3 months after the first rate cut to 12 months after the first rate cut,” Mayo wrote. “In other words, the outperformance vs. the S & P 500 in soft landings was achieved in the first three months, and in recessions, banks averaged significant underperformance over a year.” GS MS,BAC 1D mountain GS vs. MS and BAC, 1-day Some bank stocks have already seen gains in the aftermath of the Fed’s recent decision to lower rates for the first time this year. In late afternoon trading Thursday, the Invesco KBW Bank ETF (KBWB) , Goldman Sachs , Morgan Stanley and Bank of America were all ahead about 1%. In the last six months, each one has already outpaced the 18% gain in the S & P 500. Goldman Sachs has advanced 45% since March, while Morgan Stanley and Bank of America have risen 35% and 25%, respectively.
