Why Wells Fargo Stock Looks Poised to Rebound

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Shares of U.S. banking giant Wells Fargo (NYSE:WFC) have come off the rails in 2020, with WFC stock dropping nearly 13% so far in 2020 amid disappointing fourth-quarter numbers, threats to economic growth from the coronavirus from China, plunging U.S interest rates, and a flattening Treasury-note yield curve, which makes it harder for banks to make profits.

Wells Fargo Has Its Groove Back, so Stick with WFC Stock

Source: Ken Wolter / Shutterstock.com

Although things look really bad for Wells Fargo at the moment, they aren’t that bad. Instead, most of these negative catalysts are overstated and likely to be short-lived. They are big and bad today. But within a few months, they will be gone. When they disappear, Wells Fargo’s core fundamentals will improve, causing the stock to bounce back.

As a result, I think the recent weakness of Wells Fargo stock — and all bank stocks, for that matter — is a solid buying opportunity for medium-term investors.

Wells’ Negative Catalysts Will Be Short-Lived

WFC stock is facing multiple challenges right now. Almost all of them are rooted in rising concerns about the coronavirus and its potential impact on the global economy. Such concerns are  overstated and will prove to be short-lived.

The coronavirus is a horrible global epidemic that has infected tens of thousands and killed thousands. But epidemics never have a lasting impact. They arrive, they spread, they peak, they fall, and they ultimately disappear. That process never lasts more than a few quarters, and while economic activity is historically negatively impacted during that time, the economy usually bounces back like a rubber band once the epidemic ends.

There’s no reason to believe this epidemic will be any different. There are actually a few reasons to believe this epidemic will have a smaller and shorter-lived impact on global economic activity than previous outbreaks.

First, the rate of infection is already slowing, implying that the worst of the spread may already be in the rear-view mirror. Second, the virus is largely contained to China, with almost all infections outside of China happening to individuals who had recently been to Wuhan, the outbreak’s epicenter. Third, a treatment appears to be on the way, as Gilead‘s (NYSE:GILD) antiviral treatment, remdesivir, has already “worked” on a man in Washington state and is now in the early stages of being administered throughout China.

Fourth, and perhaps most importantly, central banks throughout Asia have responded to the crisis by injecting tons of fiscal stimulus into their economies, leaving them poised for a huge rebound once the outbreak ends.

Positive Catalysts Are Coming Soon

The good news for Wells Fargo is that, once coronavirus fears fade, everything will get better for the U.S. banking giant.

Plunging U.S. interest rates are a direct result of the coronavirus outbreak. Until coronavirus concerns hit the market in late January,  the yield of the U.S. 10-Year Treasury was roughly flat in 2020. Since late January, however, the yield of the 10-year has slipped about 0.25  percentage points.

Thus, once coronavirus concerns fade, it’s reasonable to believe that the longer term Treasury yields will move higher.

Importantly, while longer term Treasury yields will move higher over the next few quarters, shorter-term yields won’t. That’s because the U.S. Federal Reserve remains committed to sustaining the current expansion and likely won’t hike rates in the face of significant growth risks.

At the same time, U.S. labor markets remain healthy, corporate confidence levels are rebounding, and U.S.-China trade tensions are easing. We are also coming off a year which had the most fiscal stimulus since the Financial Crisis.

Overall, U.S. consumer and corporate economic activity should improve later in the year. As this process unfolds, Wells Fargo’s numbers will improve, and Wells Fargo stock will bounce back.

The Bottom Line on WFC Stock

Near-term concerns about coronavirus are weighing on Wells Fargo. These concerns won’t last. Within the next few months, they’ll be gone. Once they are gone, easing trade tensions and easing monetary policy will boost the economic activity of U.S. consumers and corporations. Such improvement will spark a rebound by WFC stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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