There are some industries that will obviously benefit from the availability of a COVID-19 vaccine. For example, it's not difficult to see why airlines, casinos, and cruise line stocks soared when recent positive data was announced.
However, it might come as a surprise that banks could be among the biggest beneficiaries. In this Fool Live video clip from our Nov. 9 "Industry Focus: Financials" show, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why bank stocks have performed well now that a vaccine looks like it could be coming soon.
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Jason Moser: Let's pivot over and talk about that a little bit in regard to banks, because you see banks are another sector today that are really feeling a rough. I'm looking at Bank of America (BAC 1.08%) here, for example, right now, as we're recording the show, Bank of America shares were up 14%. I was looking at Ameris Bancorp (ABCB 4.08%) earlier, Ameris Bank, 20-plus-percent today. You're seeing that covering everywhere from big banks to small banks and everywhere in between. This is an interest rate-related news, of course, but banks are going to benefit from positive economic news, they are going to benefit from a healthy economy. If this is one step closer to a healthier economy, then you can certainly understand the optimism and banks today as well.
Matt Frankel: Well, there's two reasons you're seeing banks benefit from this. No. 1 is interest rates. This is interest rates, specific news. But the 10-year Treasury sold its highest level since March today. That's a forward-looking indicator that the economy is going to be healthier than people thought. Higher interest rates means higher profits for banks, but that's really not the main driving force. The main driving force is that there is a fear that there's going to be a long tailed uptake in loan losses. People can't afford to pay their bills, things like that, that's going to go on until this pandemic is over. It's a well-founded fear. If you look at the numbers during the financial crisis when unemployment was elevated for a couple of years after the financial crisis, loan losses at some of these lenders stayed pretty high. There's that fear, and the sooner we can get back to business as usual, the sooner that fear goes away, and we're starting to see some of that today. If you look at some of the riskier consumer-facing lenders, you're seeing their gains even higher. You mentioned Ameris, which is pretty much a consumer-facing bank. American Express (AXP 0.18%) is up 21% today.
Jason Moser: Wow.
Matt Frankel: Making our friend Warren Buffett a lot of money in the process.
Jason Moser: Everybody, it's easy to forget. American Express is a bank. Yes, it's like credit card in your wallet, but it is technically a bank, and so it's behold and all of those capital requirements in those rules and whatnot that your Bank of America is with JPMorgan's (JPM 1.18%) had been here.
Matt Frankel: They are the lender for. If you use your Amex card, American Express is the Company lending you money. If you run into trouble, you lose your job, something like that and can't afford to pay it back, American Express is the one who gets left with uncollectible debt. As the fears of that start to go away, you're going to see those companies benefit. The more consumer-facing banks like American Express. Wells Fargo (WFC 1.50%) out of the big four, I think was the biggest mover today because it's a consumer-facing bank, not just an investment bank. If you look at some of the investment banks like Goldman Sachs (GS 2.99%), it's up by 7% today. The fact that it's up by 7%, it's like the worst gain in the sector, pretty impressive, that's because the investment banking businesses generally held up better during the pandemic. You're seeing all these consumer-facing banks really popped because of the experts are less fearful that you're going to see this long-tailed loan default where we've come through.
Jason Moser: Then you look even deeper into some of those numbers, and we've seen this over the past couple of quarters, at least with a lot of these banks. The themes during a lot of these calls have really revolved around those loan loss reserves, and these banks are reserving a lot of money. They're putting a lot of money aside for the possible losses that they could incur. Those losses don't materialize, or they don't materialize to the levels that those banks offer that they would, well, that's a lot of money they put aside. That is thinking to be able to go really right back down to the bottom line for these banks at the end of the day.
Matt Frankel: They called out a reserve release, and you see that you've still got a little bit in a few of the banks in the third quarter. There were setting aside billions and billions of dollars in the first half of the year, and It turned out the pandemic didn't turn out to a worst-case scenario economically. Part of that was due to the carriers act. Part of that was due to it didn't continue despite a lot of control in March. It's leveled off after the shutdowns and things like that. The economic impacts weren't a worst-case scenario. Twenty-twenty hasn't been a great economic year by any definition of the word, but we've definitely avoided a worst-case scenario. Banks were able to release a little bit reserves, some banks in during the third quarter. If there's a widely available vaccine and the pandemic ends, unemployment already is under 7% in this country. If it falls back to pre-pandemic levels which were 3% and 4% range, then you will see a lot of these reserves come back and be released and that turns into a big earnings boost for these banks. You saw that in the years following the financial crisis when they were finally allowed to release some reserves.