Cramer examines why bank stocks performed poorly this year (2024)

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Cramer examines why bank stocks performed poorly this year? ›

CNBC's Jim Cramer on Tuesday explained why many bank stocks have been beaten down on the market. To him, traditional banks have not tried hard enough to modernize their practices, get in on fintech business and adapt to a new generation of customers.

Bank stocks, under pressure through much of 2023, are once again losing ground, hampered by fresh credit quality concerns and fallout from stubbornly high interest rates . The KBW Nasdaq Bank Index came in at a reading of 98.0 at the close of Jan. 30. A week later, the index had slipped 5%, to 93.44 on Tuesday.

Bank stocks can be excellent long-term investment opportunities, but they aren't right for all investors. Bank stocks are near the middle of the risk spectrum. They can be recession-prone and are sensitive to interest rate fluctuations, just to name two major risk factors.

Cramer said that many of the Dow stocks should have been "hurt" by the consistent rate hikes by the Fed. "They should have been crushed by the inflationary spiral. They should have been annihilated by supply chain problems during COVID. None of that happened."

Bank stocks are heavily influenced by three types of risk: interest rate risk, counterparty risk, and regulatory risk. A large majority of bank assets and liabilities are interest-rate sensitive.

Deloitte expects bank profitability in 2024 to be tested due to higher funding costs and sluggish revenue growth. Banks with diversified revenue streams and strong cost discipline are likely to boost profitability and market valuation.

The lender's stocks declined after some analysts recently downgraded its target price, citing medium-term risks and a gradual recovery in net interest margins (NIMs). Investors were also cautious ahead of the release of inflation data in India and the US on Tuesday.

Office and retail property valuations have been falling since the pandemic changed where people live and work and how they shop. The Fed's efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry. That's bad news for regional banks.

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.

Bank stocks can offer strong returns in the right environment, but they can also add risk to a portfolio. Sam Taube writes about investing for NerdWallet.

What stocks does Jim Cramer recommend? ›

Jim Cramer also recommends buying Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) for long term.

And, if prices start to rise, you'll end up buying more shares at the lower prices and fewer shares when your favorite stocks start to get more expensive. In a nutshell, a recession can be a great time to buy the stocks of top-notch businesses at favorable prices.

Historically, the average annual rate of return for the stock market ranges from 10–12%. Remember that's an average—some years you'll see massive returns, and in other years you might see negative returns. But over time, you should see your money grow if you keep it invested for the long haul!

Bank stocks have had a banner year, even if big names in artificial intelligence like Nvidia NVDA have dominated headlines. The Morningstar US Banks Index is up more than 40% over the past 12 months and 9.7% since the beginning of 2024. The US market is up 35% and 9.4% over those periods.

Since 2017, 15 banks have failed, with five banks failing in 2023 alone. Republic First Bank's demise on April 26 was the first failure of 2024. Its collapse renewed fears that last year's financial instability is still lingering.

Falls in asset value are not their main risk but their assets would have to fall by one third in value to lose the value of their equity. Next, despite this massive leverage and the risk which accompanies it, returns from the banking sector are inadequate.

Economic Factors: Higher interest rates also often lead to slower economic growth, meaning people are spending less money. Inflation, recessions, and housing market crashes can all cause banks to shut down.

If you have a brokerage account through your bank, that money will be covered by the Securities Investor Protection Corporation (SIPC). The SIPC covers up to $500,000 of the securities and cash held in your brokerage account.

Bank stocks can offer strong returns in the right environment, but they can also add risk to a portfolio. Sam Taube writes about investing for NerdWallet.