Banks have not outperformed the market in a long time, and for good reason.
This year, large cap bank etf (KBE - Get Report) has risen 7% year-to-date, against the S&P 500's gain of 17%. Small cap bank etf (KRE - Get Report) has risen 3% year-to-date. With the yield curve currently inverted -- the 3 month treasury yields 1.97% while the 10 year yields 1.46% -- banks are not exactly seeing the net interest margins they'd like to see.
But most banks are attractively valued, many think. Both large and small cap banks trade roughly in line with their book values, making them potentially good buys at present, if an investor can stomach near-term pressure relating to the yield curve inversion and the evident macro economic slowdown.
"More diversified banks with more diversified revenue streams certainly would be a more balanced approach for the current environment, but with valuations and exposure to consumers, they [consumer weighted banks] could be the attractive play longer-term," said Mike Loewengart, vp of investment strategy at E*Trade. "Banks should do well in the years ahead."
Investors may be wise, to Lowengart's point, to tilt away from consumer lending oriented banks like Wells Fargo (WFC - Get Report) , whose earnings are more sensitive to the yield curve, and into diversified investment banks like Goldman Sachs (GS - Get Report) for the short-term. On the yield curve, "we may not have seen the worst yet, but it also could be improving, depending on moves we see from the Federal Reserve," Loewengart said. But longer-term investors may want to get into banks sooner rather than later, as "valuations are reasonable."
Positively for all banks, more rate cuts from the Federal Reserve would likely steepen the yield curve.