With the banking sector facing a myriad of crosscurrents — including stricter government regulations, higher interest rates and scrutiny from U.S. rating agencies — financial stocks are looking cheap. But the Club is exercising caution when it comes to our two bank names: Wells Fargo (WFC) and Morgan Stanley (MS). The KBW Bank Index , a benchmark stock index of the banking sector, has fallen more than 26% over the past six months amid ongoing investor unease following the collapse of Silicon Valley Bank in March. Shares of Wells Fargo and Morgan Stanley have lost 8.52% and 13.73%, respectively, during the same period. Although both firms have solid fundamentals and are affordable at current levels, we can’t recommend investors buy up more shares at this time given continued uncertainty over the health of the broader financial-services industry. “I can’t tell you to pull the trigger just yet [even] when both Wells Fargo and Morgan Stanley are as cheap as all get out,” Jim Cramer said during the Club’s August Monthly Meeting . Banking backdrop When Silicon Valley Bank and other regional lenders were forced to shut their doors earlier this year, the U.S. banking sector faced its biggest crisis of confidence since the 2007-2009 global financial crisis. Tremors spread globally, with UBS Group (UBS) forced to take over embattled Swiss lender Credit Suisse a few months thereafter. Banks are also operating in a high-interest-rate environment. To combat decades-high inflation, the Federal Reserve has delivered 11 rate hikes since launching a monetary-policy-tightening campaign in March 2022. The central bank’s latest 25-basis-point hike last month took benchmark borrowing costs to their highest level in more than 22 years . To be sure, higher rates can be beneficial for banks. Profitability on loans often increases if the spread between what is paid on deposits and what is generated on loans widens. But institutions accustomed to years of the Fed’s dovish monetary…
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