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Most Banks Are Screwing Up On Their Stock Picks

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Let’s say that a bank such as Goldman Sachs publishes a recommendation to “Buy Stock X”.

It’s hard to ignore a bet by a powerful investment bank such as Goldman. We are mere mortals in the pecking order, and they are supposed to be the all-knowing smart money from Wall Street.

Do we buy the stock, or is it simply wiser to pass?

Bank Performance Overall

The folks at InterTrader have done considerable legwork to dive deep into the data on investment bank recommendations made in 2015. They looked at every bet made by the 16 top banks throughout the year to assess both potential returns and accuracy.

The results are pretty underwhelming.

If you bought every stock recommended and held until the end of the year, here’s what your performance would look like:

Total performance of investment banks

Overall, when holding the stock picks for the year, banks were only 43% accurate with their predictions.

That’s right – flipping a coin would have been potentially more effective than buying bank stock picks, which ended up down -4.79% on the year. The S&P 500 finished down only -0.69%, but simply just making any interest in a savings account would have been more effective as well.

A Closer Look at Individual Banks

While banks as a whole struggled with picks in 2015, it’s also important to look at banks on a more micro level to see how they performed.

Here’s a look at the recommendations by Deutsche Bank, and how they did:

Deutsche Bank performance

Deutsche Bank nailed 41% of their predictions, and had a -8.93% return if picks were held throughout the year.

As you can see, some of their picks such as Microsoft and Wix.com gained double digits. On the other hand, recommendations such as Whiting Petroleum got absolutely crushed throughout the year, dropping -70.1%.

Overall, Deutsche Bank’s performance here definitely didn’t do much to help the struggling company get out of its rut.

Which Banks Were Most Accurate?

Here are the banks, from best to worst, based on accuracy of their calls:

Most accurate investment banks

Nomura, Credit Suisse, BAML, and Barclays all batted above .500 if stocks were held throughout the year, while 10 banks all did worse than a coin flip.

Citigroup had an off year, only nailing 14% of its picks.

Which Banks Had the Best Returns?

Here are the banks, from best to worst, based on the performance of these recommendations:

Best returns by investment banks

Just two banks, Credit Suisse and Nomura, had positive returns if stocks were held through the year. Meanwhile, Canaccord Genuity’s picks were knocked down -16% over the course of 2015.

An Important Caveat

Throughout the above article, we are showing the results if stock picks were held from when they were made until the end of the year.

However, it is worth noting that the investment banks actually did slightly better if picks were held for shorter durations of time:

TimeAccuracyGains %
30 Days55%0.80%
90 Days49%-1.48%
180 Days42%-3.66%
End of Year43%-4.79%

In other words – if you sold all stock recommendations exactly 30 days after buying, you would have actually made a 0.8% return throughout the year. This is still a lower return than a savings account, but it is an improvement on losing -4.79%!

For a more in-depth dive into the data, we highly recommend checking out InterTrader’s interactive version of the results.

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Markets

What History Reveals About Interest Rate Cuts

How have previous cycles of interest rate cuts in the U.S. impacted the economy and financial markets?

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Line chart showing the depth and duration of previous cycles of interest rate cuts.

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The following content is sponsored by New York Life Investments

What History Reveals About Interest Rate Cuts

The Federal Reserve has overseen seven cycles of interest rate cuts, averaging 26 months and 6.35 percentage points (ppts) each.

We’ve partnered with New York Life Investments to examine the impact of interest rate cut cycles on the economy and on the performance of financial assets in the U.S. to help keep investors informed. 

A Brief History of Interest Rate Cuts

Interest rates are a powerful tool that the central bank can use to spur economic activity. 

Typically, when the economy experiences a slowdown or a recession, the Federal Reserve will respond by cutting interest rates. As a result, each of the previous seven rate cut cycles—shown in the table below—occurred during or around U.S. recessions, according to data from the Federal Reserve. 

Interest Rate Cut CycleMagnitude (ppts)
July 2019–April 2020-2.4
July 2007–December 2008-5.1
November 2000–July 2003-5.5
May 1989–December 1992-6.9
August 1984–October 1986-5.8
July 1981–February 1983-10.5
July 1974–January 1977-8.3
Average-6.4

Source: Federal Reserve 07/03/2024

Understanding past economic and financial impacts of interest rate cuts can help investors prepare for future monetary policy changes.

The Economic Response: Inflation

During past cycles, data from the Federal Reserve, shows that, on average, the inflation rate continued to decline throughout (-3.4 percentage points), largely due to the lagged effects of a slower economy that normally precedes interest rate declines. 

CycleStart to end change (ppts)End to one year later (ppts)
July 2019–April 2020-1.5+3.8
July 2007–December 2008-2.3+2.6
November 2000–July 2003-1.3+0.9
May 1989–December 1992-2.5-0.2
August 1984–October 1986-2.8+3.1
July 1981–February 1983-7.3+1.1
July 1974–January 1977-6.3+1.6
Average-3.4+1.9

Source: Federal Reserve 07/03/2024. Based on the effective federal funds rate. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992, 1984-1986, 1981-1983, 1974-1977).

However, inflation played catch-up and rose by +1.9 percentage points one year after the final rate cut. With lower interest rates, consumers were incentivized to spend more and save less, which led to an uptick in the price of goods and services in six of the past seven cycles. 

The Economic Response: Real Consumer Spending Growth

Real consumer spending growth, as measured by the Bureau of Economic Analysis, typically reacted to rate cuts more quickly. 

On average, consumption growth rose slightly during the rate cut periods (+0.3 percentage points) and that increase accelerated one year later (+1.7 percentage points). 

CycleStart to end (ppts)End to one year later (ppts)
July 2019–April 2020-9.6+15.3
July 2007–December 2008-4.6+3.1
November 2000–July 2003+0.8-2.5
May 1989–December 1992+3.0-1.3
August 1984–October 1986+1.6-2.7
July 1981–February 1983+7.2-0.7
July 1974–January 1977+3.9+0.9
Average+0.3+1.7

Source: BEA 07/03/2024. Quarterly data. Consumer spending growth is based on the percent change from the preceding quarter in real personal consumption expenditures, seasonally adjusted at annual rates. Percent changes at annual rates were then used to calculate the change in growth over rate cut cycles. Data from the last full quarter before the date in question was used for calculations. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992, 1984-1986, 1981-1983, 1974-1977).

The COVID-19 pandemic and the Global Financial Crisis were outliers. Spending continued to fall during the rate cut cycles but picked up one year later.

The Investment Response: Stocks, Bonds, and Real Estate

Historically, the trend in financial asset performance differed between stocks, bonds, and real estate both during and after interest rate declines.

Stocks and real estate posted negative returns during the cutting phases, with stocks taking the bigger hit. Conversely, bonds, a traditional safe haven, gained ground. 

AssetDuring (%)1 Quarter After (%)2 Quarters After (%)4 Quarters After (%)
Stocks-6.0+18.2+19.4+23.9
Bonds+6.3+15.3+15.1+10.9
Real Estate-4.8+25.5+15.6+25.5

Source: Yahoo Finance, Federal Reserve, NAREIT 09/04/2024. The S&P 500 total return index was used to track performance of stocks. The ICE Corporate Bonds total return index was used to track the performance of bonds. The NAREIT All Equity REITs total return index was used to track the performance of real estate. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992). It is not possible to invest directly in an index. Past performance is not indicative of future results. Index definitions can be found at the end of this piece.

However, in the quarters preceding the last rate cut, all three assets increased in value. One year later, real estate had the highest average performance, followed closely by stocks, with bonds coming in third.

What’s Next for Interest Rates

In March 2024, the Federal Reserve released its Summary of Economic Projections outlining its expectation that U.S. interest rates will fall steadily in 2024 and beyond.

YearRange (%)Median (%)
Current5.25-5.505.375
20244.50-4.754.625
20253.75-4.03.875
20263.00-3.253.125
Longer run2.50-2.752.625

Source: Federal Reserve 20/03/2024

Though the timing of interest rate cuts is uncertain, being armed with the knowledge of their impact on the economy and financial markets can provide valuable insight to investors. 

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