Bank investors are now betting 2024 could be the start of another 1995

David Hollerith · Senior Reporter
Updated 5 min read

In This Article:

The start of a new rate-cutting cycle at the Federal Reserve has bank investors hoping for a return to 1995.

That was the year the banking industry began one of its best runs in US history following a series of new rate cuts from the Fed and a soft landing engineered by then-central bank chair Alan Greenspan.

An index broadly tracking the sector finished 1995 up more than 40%, outperforming the S&P 500 (GSCP). And that outperformance would hold for two more years.

Could it happen again?

So far, bank stocks are off to a good start. This year, the same banking industry index that soared in 1995 (^BKX) is up more than 19%, just behind major stock indexes.

Meanwhile, another index (XLF) tracking big banks along with other major non-bank financial firms is up 21%, just ahead of major indexes.

"History isn’t likely to repeat, but it may rhyme," Mike Mayo, a Wells Fargo analyst who covers the country’s largest banks, said of the 1995 comparison.

Mayo isn’t counting on next year being as good as that mystical year, but he does see similarities.

Better earnings ahead: Brian Moynihan, CEO of Bank of America in 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images) · (Tom Williams via Getty Images)

On the three occasions (1995, 1998, and 2019) where the Fed cut interest rates and a recession didn’t follow, bank stocks on average sold off initially after the first cut, then rallied several weeks after —outperforming the S&P 500, according to analysis from Wells Fargo Securities.

But a wider review of the past six rate-cutting cycles (including three that were followed by recessions) shows the industry’s outperformance doesn’t usually last long. Only in 1995 did banks rally more than the broader stock market for longer than three months after the first rate cut.

And back then, it wasn’t just monetary policy that lined up right for banks.

Rough start

Lenders actually started 1995 in rough shape, as major institutions buckled.

That included the municipality of Orange County, Calif., declaring bankruptcy in December of '94 and British merchant bank Barings, which collapsed in February of 1995.

Banks with big trading desks were also still recovering from serious losses from a bond market wipeout the year before — and commercial real estate lenders were still seeing loan losses from a crisis that began in the late '80s.

Meanwhile, real US GDP even slipped below 1% over the first half of the year. And yields on the longer-term 10-year Treasury plunged by 250 basis points.

Yet, crucially, those longer-term yields remained higher than short-term notes. That allowed banks, which borrow at short-term rates and lend at long-term rates, to profit by a wider margin from the difference.

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