In this segment from The Motley Fool’s Industry Focus podcast, special guest host Emily Flippen makes the connection that bank stocks tend to do well when the economies they serve also do well. Knowing that, it follows that investors considering or holding bank stocks need some insights about whether the economy will sink or swim to best position their portfolios.
Unfortunately, there is no crystal ball for the global economy. However, as host Gaby Lapera and analyst Jay Jenkins point out, despite the impossibility of predicting short-term economic movements, it is highly likely that the economy will grow and prosper over the long term. To understand why, click play below!
A transcript follows the video.
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This podcast was recorded on Jun. 20, 2016.
Emily Flippen: I think one thing we’re talking about, and we’ve gotten the gist of throughout this, is that financials are particularly sensitive to the overall economy, which is why Amanda, an intern here at The Motley Fool is wondering that, if even minor changes in unemployment and consumer confidence can have a great impact on consumers’ willingness to borrow or the repayment rates, when economic growth slows, it’s likely that the sector will slow as well. As an investor, do you expect that the economy is going to expand in the future?
Jay Jenkins: Yeah, the overall point here is totally true: Banks are very much reliant on the broader economy. If business is booming, generally, banks will be booming too. You think: Who are the customers that banks serve? They’re individuals who need jobs to not only take out loans or buy houses with mortgages, but also have savings, deposits, all these other financial services that banks serve. And, on the other side, businesses. Banks are giving loans to businesses to expand their facilities, to buy inventory, to make payroll, to do all these different things. If business is doing really well, then naturally, the bank also would be doing really well. And vice versa is also true.
In conclusion, do I expect the economy to continue to expand in the future? Long term, absolutely. Short term, your guess is as good as mine, and as good as anyone else’s. It’s impossible to predict what the economy will do in the next month or quarter, likely in the next year. But in 10 years, am I confident the economy will continue growing and doing fine? Absolutely. Twenty years, I’m even more confident. The system has proven itself for hundreds of years, if not thousands of years, for the general financial system that the world uses.
Long term, I’m very confident. Short term, I have no idea. You think, later this week, Great Britain is going to vote to potentially exit the Eurozone. How that plays out is going to have a tremendous impact on not only the markets but the global economy. There’s all sorts of worries about Chinese growth slowing down, and potentially a bubble in our economy. How that plays out will have huge implications, and no one knows how that’s going to work out. It’s impossible to predict.
Gaby Lapera: That’s totally true. But to get back to your historical point, this is part of the reason that investing in index funds make so much sense, is because historically, the economy always expands, and companies make more money over time. In theory. So, that’s part of the reason it’s such a good investment. But I also agree that, while there are a lot of worries about what’s going on globally in the financial markets, there’s also a lot of opportunity in a lot of countries. People are just starting to hook up to the greater financial market. It’s hard to see, because we’re in the United States, I think. It’s hard to realize that there’s other countries that aren’t nearly as enveloped or as enmeshed in the global economy as we are. And as those countries join, that provides a lot of opportunity for a lot of people.
Jenkins: I think domestically, as well. You buy a good company in America today, because America is the leading economy in the world, there’s a lot of advantage to that company, a lot less risk. If you can find a company that’s valued attractively, that’s in a business that’s likely to stay in business for some time to come, and you can really understand their operations and make a good case for it, that company is probably going to do well over a 10-20 year period. The U.S. economy has proven it, and I have complete faith that it will continue to.
Lapera: Yeah. But you’re right, short term, we have no idea. We wish we knew, then we would make a lot of money.
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