This week I plan to survey the universe of small and mid-cap bank stocks and try to identify a few candidates for purchase during the tax-loss selling season.
Small-cap and mid-cap stocks have strongly outperformed large cap stocks in recent years.
But in the last six months, that relationship has reversed. The small and mid-cap stocks have lagged while the Dow has led the market higher. While the economy has been weakening, investors have shown preference for the greater earnings stability of large-cap stocks.
Bank stocks have outperformed the Dow for five years, but in the last three months the banking sector has started to sag badly against the Dow. The inverted yield curve and the depressed real estate market are making it hard for banks to sustain earnings. Many bank stocks have been hit hard and as I previously noted, the decline of the banking sector is also a bad omen for the overall market.
But if the economy continues to weaken this winter, and the Fed starts to cut interest interest rates, it can be expected that bank stocks will rally. The previous pattern of small and mid-cap leadership may also reassert itself.