The Lloyds Banking Group (LSE: LLOY) share price has been clattering along near the bottom of its recent plunge since hitting a low at the beginning of April.
And I see the lack of any sustainable bounce-back as an ominous sign. If you consider cyclical stocks in other sectors, we’ve seen some strong moves back up. For example, meaty bounce-backs from the likes of Ferguson, Next and CRH.
One big difference between those companies and Lloyds is their strong underlying businesses, which have plenty of potential to fully recover in a world featuring Covid-19. Lloyds, on the other hand, is exposed to the general economy and often moves to anticipate peaks and troughs.
Lloyds rides the fortunes of others
Really, Lloyds depends on the fortunes of others. Such as the success of individuals, the prospects and performance of other businesses, and the movements of stocks and markets. If they thrive, Lloyds thrives. Sadly, the reverse is also true. And to me, that suggests huge risks for Lloyds and its shareholders now.
Some talking heads have been saying we now face the deepest economic slump in 300 years. So is a further halving of the Lloyds share price really beyond imagination? Not to me. Bank shares are known for being the first into and the first out of recessions. And as such, I think bank stocks such as Lloyds make a good litmus test for what may be coming.
The recent anaemia in the share price concerns me. We investors use all kinds of calculations aimed at working out whether a share represents good value. But I also believe the stock market is cleverer than we tend to give it credit for. After all, the entire market is made up of all the individuals participating in it – and that’s a lot of brainpower.
My first instinct is to be cautious with Lloyds. After all, the stock market has the share down where it is for good reasons. Banks face mounting losses on loans to companies and households as the UK potentially heads for its deepest recession in several generations.
A stock-picker’s market
If there’s one thing I’m certain about, it’s that this is a stock-picker’s market more than ever before. For example, some sectors contain companies thriving in the current environment, such as IT, technology, software and others. Other sectors look destined to change forever, and we may never see a return to the levels of business enjoyed before Covid-19.
And the trouble with a bank such as Lloyds is its exposure to almost all sectors. In some ways, betting on a bank stock is a bit like making a geared play on the entire stock market, and I’m not keen on doing that right now.
Even the banks themselves have experienced changes in working practices that seemed unimaginable just weeks ago. Indeed, many bank staff are working from bedrooms, kitchens, studies and conservatories at home. And the directors of banks are looking at the potential cost savings with an eye to making some of the changes permanent.
The world will emerge changed from this crisis and I can’t predict how that will pan out for a stock such as Lloyds, so I’m avoiding it. Indeed, it really could go lower – perhaps even much lower.
