Recovery in U.S. Economy to Benefit Wells Fargo & Co (WFC)

Wells Fargo & Co (NYSE:WFC) was one of the few banking stocks that survived the financial crisis bravely though with the support of the Federal Reserve. Since then, the financial sector has not been getting the kind of attraction that it deserves to be for one or the other reason impacting the sentiments. Just when everyone thought that banking stocks could see the biggest gain in the current year after writing down most of the charges related to the crisis, the exposure to the oil and gas sector dragged down the sentiments. Now that the oil price is also showing some recovery compared to the 12-year low levels, the banking stocks could be in the limelight again.

Economy In Better Shape Than Expected

Wells Fargo & Co (NYSE:WFC) and other sectors stocks suffered earlier in the year as there was concerns about the strength in the American economy. Also, there were threats of negative interest rates and rate cuts when the industry was hoping for a rate hike. However, the data release in March suggested that the economy was in much better position than the analysts feared. As a result, there were hopes that the economy will do better in the current year. Also, last Friday, the government announced its third estimate of GDP for the fourth quarter that came in better than estimated.

Wells Fargo & Co (NYSE:WFC)’s growth hinges on the economic conditions and the recent data supports its cause. As a result, there is expectation among the economists that the American economy could continue to grow at a pace of 2 – 3% in the current year. This is backed by the estimated increase in the manufacturing to 2.6% in the current year. The same will likely to grow 3.0 next year and 2.8% in the following year. There were two factors that drive the confidence on the economy. One was the employment data and the other was the housing statistics. Both are looking favorable only as the credit demand will likely increase to help its net interest income grow.

Buffett Bets

Warren Buffett controlled Berkshire Hathaway Inc. (NYSE:BRK.A) has identified Wells Fargo & Co (NYSE:WFC) as one of the big four investments. It was well-known that Buffett has been betting on International Business Machines Corp. (NYSE:IBM). Now the billionaire investor has boosted its stake to cross 10% holding in the financial company thus triggering a review from the Central Bank, which comes into picture in case of any controlling influence. In February, Buffett pointed out that WFC as a ‘terrific operation’ since it was able to generate more than $20 billion net income a year. He credited John Stumpf for the fabulous job.

Housing Still Offers Scope To Expand

Wells Fargo & Co (NYSE:WFC) could take advantage of the available opportunity in the housing space, which is yet to see the peak. Though the sector has seen improvements and come out of the woods, it is yet to reach the peak it once witnessed in 2007 or 2008. The company is the top residential mortgage originator and the current market scenario might suggest a subdued trend. However, the housing market is predicted to grow during the rest of the period in the current year as the recovery will also pick up steam.

The confidence about the recovery is based on the National Association of Home Builders (NAHB) data, pent-up demand, steady employment, affordable home prices, and economic growth. Aside from that, attractive mortgage rates would also force the buyers to keep the market on an uptrend in the current year. These factors should also help Wells Fargo & Co (NYSE:WFC). Also, there is expectation that the Fed will boost its Interest rates by another 25 basis points probably next month. That will increase the borrowing costs. However, the consumers would resort to investing in housing in the current year as the Fed is likely to announce 50 or 75 basis points rate hikes in two or three trenches. Naturally, buyers would like to take advantage before that happens. That should boost the stock value.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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