The United States Department of Justice has reportedly issued grand jury subpoenas to big banks seeking information on how they distributed emergency coronavirus funds that were intended to keep small businesses only.
Reuters reported that the move was “part of a broader investigation into potential abuse” of the $660 billion Paycheck Protection Program (PPP).
“The previously unreported subpoenas issued by the department’s Washington fraud division do not necessarily indicate wrongdoing on the part of the banks, but will compound growing worries among lenders that they risk being swept up in a federal crackdown on Paycheck Protection Program fraud,” Reuters reported.
“The Justice Department opened a probe into the program last month and has already brought criminal charges against borrowers it alleges lied about the state of their businesses and numbers of employees.”
Dividend-Rich Bank Stocks Are Late but Back
The bounce in financial stocks could be a good sign for the broader stock market if it continues.
The financial sector is like an early warning signal for the economy, and the stocks have been lagging the broader market and every other sector but consumer staples since the March low. They have gained just 25% since March 23, compared to the 33% gain in the S&P 500. Financials are also about 29% below their January high, lagging only energy stocks, which are 38% from their 52-week high set last July.
“I think a bounce in banks is good in general,” said Sam Stovall, chief investment strategist at CFRA. “Usually the financials in general, the banks in particular, are the canary in the coal mine because the economy really can’t grow unless the banks are lending. If investors believe people will not be borrowing then…. they have a lot of problems.”
The Financial Select Sector SPDR ETF rallied 5.1% Monday, as banks surged after Fed Chairman Jerome Powell said the Fed can do more to help the economy. Banks also moved higher with the broader market on optimism about a potential coronavirus vaccine, which showed good results in early trials. The financial sector, up 5.3% Monday, was third-best sector behind energy and industrials.
Investors have lately avoided the group for fear the recession will crush profitability and result in rising loan losses. But the stocks rallied last week, after Powell said he opposed negative rates, which would be bad for bank profitability. Unfortunately, they then fizzled Friday.
Mike Mayo, Wells Fargo banking analyst, said there was also positive news for the group, when Warren Buffett’s Berkshire Hathaway disclosed that its holdings continue to be heavily in banks, even though they sold a large chunk of a long-held stake in Goldman Sachs and shed some of its JPMorgan stock.
“Buffett still has basically his biggest investment in history in the banks. That’s quite a statement. He’s not afraid to bail when something’s not going the way it should. The best investor of all time has his biggest investment ever, less 3%, in banks. Maybe he knows something the market is missing,” Mayo told CNBC in an email.
Stocks Popped on Promising News from Moderna
Five experts break down what comes next.
Jonathan Golub, chief U.S. equity strategist at Credit Suisse, thought the rally may be overdone:
“I think that we’re overplaying the near-term news. If there was absolutely no news of a vaccine, the stock market would probably be up [Monday] the same way that it’s been up the last, you know, month or more. And this is really a story of a huge amount of liquidity and stimulus coming from the government. And if you look at the overall news flow, I’m not sure that it would by itself warrant the kind of move that we’ve had right here.”
Jim Cramer, host of CNBC’s “Mad Money,” said one stock continues to outperform:
“This is a really big week for earnings. Huge. Walmart is a dominant stock and psychologically Home Depot, Lowe’s, Target really matters. Oh by the way, all the people who felt that certain stocks that have been doing well are going to start selling off, I go back to Nvidia. It reports this week but there’s no sign that Nvidia is done — in part because there’s a big gaming cycle and in part because they have those inference chips, the ones that really can actually understand slang.… The Achilles’ heel of this market that nobody talks about, it’s not the cruise ships, it’s not some retail, it’s Wells Fargo. It’s the banks, and they’re screaming today. And I think that really matters … their stocks are saying default, default, default.”
Samantha Azzarello, global market strategist at J.P. Morgan Asset Management, claimed there’s a disconnect between the economy and markets:
“I think the volatility right now is tied to a bunch of different things whether we’re going up or going down — right it’s vaccine news, it’s treatment news, it’s Jay Powell speaking, we know that. I still think though there’s a little bit of a disconnect between the real side of the economy and what’s happening with the macro data, in particular the labor market, and then what’s happening on the financial side just given that spreads have tightened which is obviously good, the market is up, which is good, and conditions are loose so I think we’re just monitoring that gap between one and the other to kind of see where things go over the next couple months.”
David Harden, president of Summit Global Investments, warned that certain names may have run too far, too fast:
“From a standpoint of the market fundamentals, what earnings are happening, we have companies that are not earning as much as they need to, they’re having struggles with employment. We have 35 million-plus people unemployed right now. That’s the economy, that’s the reality of the fundamentals. When you have companies like Zoom, which is more than all seven of the top airlines combined, its valuation is very, very large.… I think you do have some companies that are overextended in this market.”
Alli McCartney, managing director at UBS Private Wealth Management, stated that equities are priced for perfection:
“Equity is pricing in the best-case scenario here which for myriad reasons is not something that I can get behind. Credit, however, is pricing in somewhere between sort of a downside second wave, maybe we haven’t hit a low and the base-case scenario, which is that we keep on slowly going up from here.”