Potential Rise in Bank Stocks Following Fed Rate Cut

Bank stocks may see an uptick after the Federal Reserve decided to lower its primary overnight borrowing rate by a quarter point. According to Wells Fargo’s data, banks typically trend upwards following the Fed’s initial cuts during the past six rate reduction cycles, with a notable average decline of 6% over the first 7-8 trading days. Interestingly, during the three periods that avoided recession—1995, 1998, and 2019—bank stocks generally increased by about 21% in the aftermath of the cuts.

In contrast, the last three rate cuts leading to economic downturns—1989, 2001, and 2007—saw bank stocks initially dip, and they struggled to recover in subsequent quarters. Mike Mayo, a bank analyst at Wells Fargo, pointed out in a recent report that many investors perceive banks positively when interest rates are cut. He noted that historically, rate cuts that did not lead to recession have bolstered bank stock values.

However, Mayo also cautioned against prolonged trading in bank stocks, recommending that investors remain vigilant. While banks tend to perform well after the Fed’s initial cuts, most gains historically occurred within the first three months. He indicated that in seven of the eight past rate cut cycles, banks slowed the S&P 500’s performance during the three months following the first cut. This suggests that while there may be short-term successes, banks often underperform over the course of a year post-recession.

In the wake of the Fed’s recent decision, some bank stocks like Goldman Sachs, Morgan Stanley, and Bank of America have already seen slight gains, each rising about 1% on the day following the announcement. Over the past six months, these stocks have all exceeded an 18% increase tied to the S&P 500. Specifically, Goldman Sachs has surged by 45% since March, while Morgan Stanley and Bank of America reported increases of 35% and 25%, respectively.