A Time for Investors

While Black Friday and Cyber Monday are synonymous with retail frenzy, they also signal a crucial period for investors to scout for market bargains as the year winds down. Unlike traditional store shoppers, I've always preferred the ease of online shopping. Amazon, in particular, has augmented the stress of the hustle and bustle of physical stores for me. My approach is calm and collected; if I don't find what I'm looking for in-store, I simply turn to Google. No unnecessary stress or impulsive purchases.

On Black Friday, after a morning of work (Markets close at 1 PM!), I enjoy visiting local shops in Media, PA, supporting our Members’ Wealth 'Shop Local' initiative. I make it a point to purchase something from each store for my holiday list. Then, settling into a café with a coffee, I open my laptop amidst the lively buzz to complete my shopping online. This controlled, enjoyable shopping experience is mirrored in my approach to year-end investing.

At Members’ Wealth, our investment hunt is year-round. However, my personal excitement spikes at year's end, influenced by my early investment career encounter with the 'Dogs of the Dow Theory'[i]. This strategy involves sifting through the year's overlooked areas of the market (be it bonds, stocks, or other asset class) to find potential 'phoenixes' ready to rise. This year, one area that caught our attention is the banking sector, which has faced relentless challenges[ii].

According to a recent Kobeissi Letter, U.S. bank stocks have struggled to recover from the regional banking crisis this spring, with their value at record lows relative to the S&P 500. (See Chart 1)

Factors like the $650 billion in unrealized losses (as reported by Moody's) and the looming troubles in commercial real estate paint a grim picture for the sector. Smells like a bargain.

However, not all banks are in the same boat. The largest banks benefit from significantly lower funding costs and higher profit margins compared to regional banks, which struggle with less diversified balance sheets and higher risk concentrations. (Chart 2: Top Four Banks Pay Lower Interest Rates to Consumers)

This disparity makes it challenging to identify promising investment opportunities within the regional banking sector.

While a current review of banks has been enlightening and highlights the current slowdown in bank lending (Chart 3: Rapid decline In bank lending) , the timeline for a quick turnaround does readily apparent to us at this point. Clients may already have some exposure to banking, through various strategies that they use in their portfolios, however, it does not seem that any of the strategies are as of yet placing too great an emphasis on banking, but we will keep an eye on it.

Thus, our 'phoenix' might not immediately emerge from the banking sector, which faces long-term challenges, and needs time for balance sheet repair. To be clear, a phoenix may rise, we just don’t see it, yet.

This recent review of banks is akin to my online shopping experience. Just as the internet saves me from settling for less during the holidays, a disciplined investment approach helps in not rushing into unworthy deals. With my holiday shopping already finished up, I'm all set to explore other potential promising avenues in the market, while I procrastinate on wrapping, said gifts.

Happy Holidays and Happy Investment Shopping!

[i] The "Dogs of the Dow" strategy is an investment approach where investors select the ten highest dividend-yielding stocks from the Dow Jones Industrial Average at the beginning of each year. This strategy is based on the belief that these stocks are likely to rebound and offer a combination of appreciable stock price and steady dividend income.

[ii] While we would not typically invest directly into a particular bank stock for a client, nor into a specific sector, we would seek out where we have that exposure in the portfolio. There might be an actively management investment manager that has a specialty in banking or perhaps an area of the market like small and mid cap value stocks that have a relatively high percentage of banking stocks. If we identify an opportunity, we could rebalance the portfolio for those clients where it makes sense to increase the exposure to that particular area of the portfolio.

The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. This index does not reflect the deduction of any fees. It is not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index.

The charts are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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