Asking whether the Lloyds Bank (LSE: LLOY) share price is set for a big rise strikes me as a reasonable question. It’s around 46p, as I write, and has climbed by almost 9% since early May. It’s now only around 7% down from where it stood a year ago.
But isn’t that a little odd? After all, we know bank stocks are among the most cyclical beasts on the stock market. And the economic news has been grim lately. Therefore, shouldn’t Lloyds’ shares be falling rather than drifting higher? I don’t think so. And that’s because shares tend to operate as leading market indicators. And real-world economic data lags because the events have already happened before we see the figures.
Lloyds looks attractive
That means times of economic bad news could be decent opportunities to pick up some shares in Lloyds. Indeed, the stock has been weak for some time. And its recent buoyancy could be trying to signal improving economic conditions ahead. I think that’s relevant because the share price was as high as 70p in 2018 when the economic news was better.
Meanwhile, The Bank of England’s Monetary Policy Committee released its most recent report on 5 May. And it pointed to UK gross domestic product (GDP) growth of around 0.9% in the first quarter of 2022 — “stronger than expected in the February Monetary Policy Report.” The unemployment rate fell to 3.8% in the three months to February, the report said. And it mentioned that surveys of business activity “have generally remained strong”.
Considering all the indicators, the committee estimates that UK GDP will likely be “broadly” unchanged in the second quarter of the year. We’ll find out more after the next meeting due on 16 June. But for now, it looks like a technical recession remains absent from the UK economy and that may be one reason Lloyds shares have been creeping higher.
Meanwhile, Lloyds sports some tasty valuation indicators. The price-to-tangible-book value is running at about 0.8. And the forward-looking dividend yield for 2023 is around 5.6%. Although forecasts can change and the directors have the power to trim or cancel dividends at any time. Nevertheless, it’s hard to make a case for Lloyds looking expensive.
Cyclicality can be tricky
But perhaps the biggest risk with Lloyds is that cash flow and earnings could fall because of weakness in the general economy. And if that happens, the valuation indicators will not look so tempting. And Lloyds has a long history of famine or feast business economics.
So to attempt to gauge whether Lloyds shares are likely to rise further, it’s important to form an opinion about where the general economy may be heading. And at the end of April, Lloyds said: “Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain”.
And that’s about as good as it gets when considering any stock to buy — outlooks can never be certain.
I don’t own any shares in Lloyds but can see their potential for further rises ahead. However, that potential comes with the cyclical risks touched on today.
