It is our opinion that the Fed’s stress tests on systematically important financial institutions and the significance of the tests will decline as we get farther away from 2008. We are also convinced that a large number of Millennials will want to borrow, once they have kids, to buy homes and cars. The spooky post-financial meltdown era dominates investors’ thinking. We have learned that there is only one thing we can guarantee in investing―that eventually things change. This means politicians and regulators come and go and demographic/psychological factors must be anticipated in a contrary way. Here is how Moynihan explained why he is not bothered by living through this phase of financial history:
“Mr. Moynihan also dismissed the anti-bank rhetoric in Washington and in the presidential campaign. ‘We made $16 billion last year after tax,’ he said. ‘That’s worth grinning and bearing.’”
Finally, we are more than willing to accept the stress we receive from owning these major financial stocks, as a test of our eight criteria for stock selection. We did so in 2011 and accepted the stress of weak financial stock price performance. This was right before financials ripped the cover off the ball from 2012-2014 and outperformed the market. We accept this performance “stress test” because there could be a huge reward if our economy improves with the aging of our largest adult group and if regulators and politicians find something better to build their reputation on. Remember the old and wonderful quote that originated with Ben Graham, “The stock market was invented to move money from the impatient to those who are patient.”
1Source: The Wall Street Journal
2Past performance is no guarantee of future results. Source: Merrill Lynch report March 30, 2016; What Investor’s Want.
William Smead is CEO and chief investment officer at Smead Capital Management.