Too Many Uncertainties
While the stock market has recently rebounded so that the S&P Index is now down less than 10% for the year and oil prices have stabilized as Russia and Saudi Arabia announced production freezes, there remain too many uncertainties to provide real economic optimism in the near term. With China’s economic woes and Japan’s negative interest issues, as well as rampant economic issues in South American countries such as Brazil, serious concerns about the fragility of our economy remain. Further on the horizon is the impact that the U.S. Presidential election will have on our economy. All of this has led to the Fed retreating from any imminent further interest rate increases.
Is Another Bubble Possible?
As I referenced in my last Cyber-Graham, rapidly rising home real estate values, combined with massive new construction in many downtown corridors, raise concerns about the possibility of another real estate bubble. No doubt, the bank regulators are watching these trends carefully, astutely trying to avoid a replay of 2007 and 2008.
The Volatility of the Stock Market
The extreme volatility of the stock market in 2016 should be a concern to all investors. Retirement plans are heavily impacted and baby boomers who are still significantly in the market must be having palpitations. As far as the banks, this could adversely impact capital raising efforts due to pricing and investor concerns. Clearly, stock deals are much more challenging, as values decline and become more problematic going forward. Given these uncertainties, sellers doing stock deals should focus on the quality of the buyer’s stock and the strength of that company as a whole. Remember, when you are doing a stock deal, you are reinvesting your stock for someone else’s.
Caution is the Watchword
While I am not forecasting another recession, my sense is that it is prudent for boards and management to act cautiously and thoughtfully in these uncertain times. Clearly things cycle, but it is unclear just where we are in the cycle. Healthy growth through smart acquisitions or sales are all still viable strategies. However, carefully considering your path frequently seems sensible.Maintaining a strong capital position, appropriate reserves, and a focus on asset quality and regulatory compliance are a smart way to go.
The Challenge of Remaining Independent
Large, medium, or small, banks who want to stay the course must earn their independence. Performance is always the difference maker. Ultimately, as a buyer, a seller, or a maintainer, your performance will dictate your value over the long term. Therefore, boards and management should continue to focus on performance metrics more than ever to protect against the uncertainties that seem to lie ahead for 2016.