This story appears in the November 2, 2015 issue of Forbes.
Bank stocks have lagged lately. Folks fear ills from future U.S. rate hikes, an emerging markets currency cliff, continued regulatory overreach and more. But it’s simpler: It’s behavioralism. Our last crisis was ultra-bank-focused, god-awful–and investors usually keep fighting the last war.
In the June 2015 issue of the Journal of Banking & Finance three researchers from Germany’s Technische Universität Dortmund demonstrated that irrational market fears lead investors to panic, sentiment that punishes bank stocks regardless of basics. To put it simply, folks freak out on banks easier than on most stocks nowadays.
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And they’re freaking out now. You should game that. The best thing the Fed could do is hike rates so folks get over crying wolf. Initial rate hikes have never been problematic, ever. Time will tether the emerging market currency fears, like it did neatly in both 1997 and 1998. All these fears are priced. The fundamentals–less so.
Then, too, financials make up 21.6% of the world market (the very biggest weighting) and 16.5 % of the S&P 500. Owning none risks getting left behind. If you dislike banks and you’re right, you could still own a 10% weight and beat the market. If you’re wrong, and banks bounce back as I expect, underweighting materially means you’re toast.