If Investment Banks Know Financial Markets So Well, Why Are Their Stocks So Low?

By Trey Thoelcke Updated Jan 13, 5:59AM EST · Published Jul 7, 10:45AM EDT

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If Investment Banks Know Financial Markets So Well, Why Are Their Stocks So Low? — © Thinkstock

It’s very easy to get lost in the cacophony of investment bank stock ratings and long-term trend calls on asset classes. When big banks like Goldman Sachs Group Inc. (NYSE: GS) or Citigroup Inc. (NYSE: C) come out with a new rating or prediction, as they just did regarding where the British pound will bottom post-Brexit, investors take notice and prices move. Sometimes, though, it helps to zoom out and see the forest for the trees. Should these banks be listened to, ignored or perhaps even used as contrary indicators?

Zooming out then, it may come as a shock, but out of the 10 largest investment banks by assets, only one of them, Bank of America Corp. (NYSE: BAC), has outperformed the S&P 500 since bear market bottom on March 6, 2009. Given that one of the main sources of income for investment banks is their hopefully successful trading activity, then the better their stock calls, the better their own stocks should perform. And yet, one would be better off simply holding the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) than buying and holding the stocks of almost any investment bank, who are supposedly the experts in calling tops and bottoms in stocks and assets of all kinds.

Not to give Bank of America too much credit though, the big bank is only outperforming the S&P 500 by 40 percentage points since 2009, and on any other long-term timeframe it is an embarrassing underperformer. Going back 10 years for example, Bank of America is down 75% while the S&P is up 61%. If this isn’t a case of the emperor having no clothes, it’s hard to tell what is.

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It’s not even just the investment banks on public markets. The very bank of these banks, the Federal Reserve, seems equally clueless as to what it is supposed to be doing. Back at the beginning of the year, the Federal Open Market Committee (FOMC) released a statement to the effect that “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Meanwhile, the latest FOMC minutes, released, July 6, contained this passage:

… some noted that their forecasts were now consistent with a shallower path [for increasing the federal funds rate] than they had expected at the time of the March meeting. Many participants commented that the level of the federal funds rate consistent with maintaining trend economic growth–the so-called neutral rate–appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier.

That meeting took place before Britain’s Brexit decision, which was cited as another reason not to raise rates due to the economic uncertainty it engendered. One wonders how shallow the path to a higher federal funds rate will be, come the next FOMC minutes release.

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About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.