There's a bull market coming in bank stocks, Tom Brown, CEO of Second Curve Capital, a New York hedge fund invested heavily in the financial sector, told the BAI Retail Delivery Show.
The stock market rebound will precede a general economic recovery—likely coming within a few months, Brown said.
Brown, who was an award-winning stock analyst before founding Second Curve, pointed to several indicators that bank stocks are near bottom: including low valuations, high volatility, and retail investors withdrawal from the stock market.
"All the factors are lining up for the stock market to start performing betterIt's going to start off slow with many disbelievers and then it will be off the charts," Brown said.
For bank stocks, in particular, the last time they were so poorly valued was in the late seventies, which, is, Brown said "incredible since we have such low inflation now." However, today the same percentage of bank stocks are valued at less than 10 percent of their price to earnings (P/E) ration, he said.
On volatility, Brown said periods of high volatility historically give way to phases of steady growth. What he classified as "mega-moves"—where the stock market moves up or down more than five percent in one day—have happened only 17 times since the 1940s. Significantly, he added, "We've had four of these in 2008."
"The retail investors have it wrong," he added. "When they typically pull money out of the market, it's at the bottom."
When the last bull market in banking stocks began, on Nov. 1, 1990, nonperforming assets were still on the ascent. "The economy's bad and going south," he said, "but we don't need to see things get better before the market will go up."
Brown is also publisher of a free web site where he blogs about bank stocks, bankstocks.com.