Saturday, December 5, 2020

THINK STRATEGICALLY: Change and Transformation

By on August 17, 2020

(Photo by Joe Taylor on Unsplash)

How have the top U.S. banks fared during the pandemic

The top U.S. banks had seen some of their best performances under the Trump presidency from January 20, 2017 until February 28, 2020, when the pandemic officially began to hit the United States.

The confluence of the pandemic, the loan loss reserves of $32.9 billion, the pace of digitalization forced by COVID-19, and several other changes that have affected the banking industry have pushed transformation to the top of the agenda of today’s business leaders. The rapid momentum of all technological changes continues to alter the operational landscape of all businesses in all sectors. These disruptive forces have rendered the era of once-and-done transformation a thing of the past. 

For these reasons, we decided to embark on an analytical study of the top U.S. banking institutions. We examine the top U.S. bank holding companies that are part of the Birling Capital U.S. Bank Stock Index (BCUSBI), a market value-weighted index composed of the top six bank holding companies based in the United States.  

From Jan. 20 to Feb. 28, the top banks performed as follows:

  • J.P. Morgan had a return of 38.77%, 
  • Bank of America: 25.88%, 
  • Citi: 13.1%, 
  • Morgan Stanley: 5.73%,
  • Goldman Sachs: minus-13.54%,
  • Wells Fargo: minus-25.82%.

We examine how each of the bank holding companies’ stock has fared once the pandemic began and evaluate their performance. When comparing the Birling Capital U.S. Bank Stock Index (BCUSBI) to the Dow Jones Industrial Average from March 1 to Aug. 14, the return on the BCUSBI was minus-22.29% and the Dow was 9.92%. 

The Birling Capital U.S. Bank Stock Index includes the following institutions, ranked according to their performance during the pandemic.

  • Morgan Stanley (MS): Its stock closed at $52.30 and achieved a total return of 16.14%.
  • Goldman Sachs Group (GS: Closed at $207.97, achieved a total return of 3.59%.
  • Bank of America (BAC): Closed at $26.47, achieved a total return of minus-7.12%.
  • JP Morgan Chase(JPM): Closed at $102.41, achieved a total return of minus-11.6%.
  • Citigroup Inc. (C): Closed at $52.93, achieved a total return of minus-16.59%.
  • Wells Fargo & Co (WFC): Closed at $25.30, achieved a total return of minus-38.07%.

Although many banks have started to embrace all-digital operating models, some services remain with a foot in the past, and these changes have been primarily designed to protect their franchises and offer clients alternatives to their brick and mortar operations. However, a new operational banking model should emerge with renewed business agility, completely digitized and that is positioned for the sector’s future growth.

Week in Markets: Markets Near All-Time Highs with Improved Economic Data 

The U.S. stock market finished the week with another gain, while it seems quite distant it has been almost 180 days since the bear market showed its ugly face. It seems almost incredible to note that three of the major indices are within a stone’s throw of their highs, below the results:

•The Dow Jones Industrial Average is 5.48% from its all-time high.

•The S&P 500 is 0.39% away from its all-time high.

•The NASDAQ Composite is 0.8% close to its all-time high.

•The Birling Capital Puerto Rico Stock Index has much ground to cover as it is down 25.93% from its record. 

If the markets reach all-time highs, this will be the second quickest bear market recovery in the last 50 years; however, the very nature of this recovery reflects the unique conditions that forced the economic shutdown and its reopenings.

We believe that investors had too much uncertainty on their minds this time to surpass all-time highs. For one, the lack of an agreement between Congress and the White House to push ahead  another stimulus bill and the growing coronavirus cases may impact the economic recovery.

One of the main aspects that have impacted the market recovery is more significant than expected actions from Congress, the Federal Reserve Bank, and the White House. The fiscal measures have been broad enough to support both corporations and families in need with a large safety net. These collective actions have averted thousands of bankruptcies, home evictions and many other repercussions that the pandemic shutdown has forced on a large number of people. 

Three critical indicators with signs of improvement follow:

  • U.S. Initial Claims for Unemployment Insurance: 963,000, down from 1.191 million last week, a reduction of 19.14%.
  • U.S. Business Sales: $1.394 trillion, up from $1.286 trillion last month, an increase of 8.42%.
  • U.S. Business Inventories month-over-month saw some improvement at minus-1.10%, compared to with minus-2.35% the previous month, a 53.19% improvement. 

As we have often mentioned, Wall Street is forward-looking, this explains why we see the market rebound significantly as soon as shutdown measures are lifted.   

The U.S. and Puerto Rico economies have a long way from reaching the pre-coronavirus gross domestic product levels. The nature of the stock rally is the contemplation of continued economic recovery and rising corporate profits during the remainder of the year and the next year.

Results for the week ending Aug. 14:

  • The Dow Jones Industrial Average closed at 27,931.02, up 34.3 points, or 0.12%.
  • The Standard & Poor’s 500 Index closed at 3,372.85, down 0.58 points, or 0.02%.
  • The NASDAQ Composite Index closed at 11,019.30, down 23.2 points, or 0.21%.
  • The Birling Capital Puerto Rico Stock Index closed at 1,501.15, up 17.6 points, or 1.16%.
  • The U.S. Treasury 10-year note closed flat, at 0.71%.
  • The U.S. Treasury 2-year note closed lower, at 0.14%.

The Final Word: Fear Moves Markets and Pandemics

My grandfather used to say there is nothing more nervous than a $100 bill; it is a metaphor of how making or losing money makes people fearful. The role psychology plays on investors’ decisions is often greatly underestimated by many, which can cause significant ups and downs in the investments they hold.

As we continue to experience market volatility, we also encounter the oscillation of emotion and psychology. They are the biggest influencers of economic and corporate profit cycles. It is human nature. When we feel good about our prospects and the fundamentals of the markets, most investors get greedy and focus on making money. Their greed and hubris cause markets to rise, and most asset classes to increase in value. However, as soon as uncertainty or negativity dominates the markets, fear takes over, as does thinking to preserve holdings, hence less buying. The best advice we can provide investors is to resist external influences, remain emotionally balanced, act rationally, and weigh both negative and positive events.  

According to the World Health Organization, there are more than 21.3 million confirmed cases of coronavirus and close to 770,000 deaths. However, I want to focus on the recent rise in cases in Puerto Rico. We examined the growth rate of the coronavirus from July 15 to Aug. 15. We noted the following on July 15, Puerto Rico had 10,379 confirmed cases with 171 deaths, On Aug. 15 the number rose to 25,695 cases and 379 deaths, this is a case increase in 30 days of 147.5% in cases and 92.4% in overall mortality. The increase in infections and deaths is caused by irresponsible human behavior. We note that contrary to other jurisdictions, people who are 20 to 30 years old are the bulk of the infections.

I have said it before, and I will repeat it, the insensible sense of privilege with which some people behave themselves will cause thousands of infections and deaths.

You must be logged in to post a comment Login