Bank stocks like JPMorgan Chase (NYSE:JPM) have historically underperformed the S&P 500. So, value investors had to be delighted with the performance of JPM stock in 2019. The stock was plodding along with steady, if not spectacular growth of around 10%. Then the fourth quarter happened. JPM stock jumped approximately 25% in the last three months of the year.
Some of that was based on investors taking a sigh of relief as the United States and China reached a framework on a “phase one” trade agreement. Bank stocks were also buoyed by the Federal Reserve’s announcement that interest rates were likely to remain unchanged through 2020.
But the reality is that bank stocks are typically not good investment for growth investors. Nevertheless, in the last five years, JPMorgan has been behaving like a growth stock. And even if a regression to the average is in store for JPM stock, it still looks like the best of the bank stocks.
Black Swans Create Uncertainty in the Economy
In January, I cautioned investors about investing in Bank of America (NYSE:BAC) stock. My rationale was that BAC is, first and foremost, a bank stock. Bank stocks were garnering the attention of bullish investors. But that was based on a positive economic outlook. However, our inability to know what we don’t know was a reason I advised caution.
No sooner was that article posted, than the coronavirus from China began to rear its head. Black swan events such as disease outbreaks have an impact on the market in general. But they can have a particular effect on bank stocks. If businesses start to cut back on investments, it hurts these stocks more acutely because in a low-interest rate environment, loans are a primary source of revenue for banks.
And that makes it reasonable to wonder if there are more black swan events to come. This is particularly prescient in an election year. JPMorgan stock got a small boost in the aftermath of the Iowa caucus chaos.
Regardless of your political leanings, the market does not like uncertainty. If investors feel confident that the economic policies of the last three years will continue, that will be good for bank stocks. But it’s a long road until November. Until then, there will be some ups and downs.
JPMorgan May Not Be Able to Count on Share Buybacks
The Wall Street Journal recently reported that JPMorgan may not be able to use stock buybacks to sooth investors’ concerns about growth. Many bank stocks have a long history of rewarding their shareholders with dividends. However, in recent years, particularly as banks are recovering from the financial crisis, they have been using stock buybacks as a way to reward shareholders as well as to promote stock price growth.
But share buybacks, which are controversial in the best of times, are starting to generate outright hostility from detractors. The two arguments against share buybacks work together.
The first argument against this tactic is that buybacks do nothing to help the performance of the business. They don’t raise employee wages, for instance. That leads to the second argument. Shareholders only see a benefit from the buyback if the company’s stock price rises.
In the banking sector, JPMorgan is one of many banks that have issued stock buybacks. But they are one of the only banks that have seen their stock price increase. For example, in 2019 with dividends reinvested, JPMorgan gave investors a total return of over 40%.
But it’s fair to ask if that can last.
History Suggests JPM Stock Will Regress
Over the last 10 years, JPM stock (with dividends reinvested) has averaged just over a 16% total return. That suggests that last year’s growth is an outlier. And in an environment where there appear to be a number of headwinds, it’s likely that JPM stock will not have the same kind of performance. In fact, the stock is down nearly 5% in the first month of 2020.
Analysts are also anticipating a return to single-digit growth for the company’s earnings per share. That being said, JPMorgan still offers an attractive dividend. And even if the effect of continued stock buybacks is muted, the company still makes an attractive case for its shareholders.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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