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Why has the Lloyds share price jumped 40% in a month?

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As a Lloyds Banking Group (LSE: LLOY) shareholder, in normal times I’d be really happy to see a 40% jump in the shares. And the Lloyds share price did exactly that between the end of October and market close on Tuesday. But it hardly seems like a time for rejoicing, not when I’m down 40% year-to-date. And down further than that since I first bought.

But it’s better than the FTSE 100 in November, up just 15% over the same period. So what’s caused the Lloyds share price spike? I’ll tell you something I don’t think it is.

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I don’t think it’s anything to do with the underlying long-term health of the bank itself. Yes, I know things have improved since we got the news of three successful Covid-19 vaccine trials. But that was surely going to happen, sooner or later. I can’t see Lloyds in five years’ time being materially much different should vaccinations start next summer instead of December.

Lloyds share price hit by falling profit

Admittedly, the first nine months of the year brought a pre-tax profit of just £620m, compared to £2,562m in the same period in 2019. That surely justifies the Lloyds share price crash, doesn’t it? But that’s now, not next year. And certainly not 2025. And while we wait for post-pandemic days to arrive, Lloyds’ liquidity looks just fine to me. There was no need for stress tests this year, as we had real stress. But I see no risk of Lloyds going under, or coming close to it.

Now, I say I don’t think Lloyds’ long-term fundamental outlook is significantly changed. But that’s not what the markets work on. No, markets work on the short term. On what’s expected this year, this quarter, even next week. And for short-term followers, I can see how Lloyds with a vaccine can look far more attractive that Lloyds without a vaccine. But those who take a long-term view of the Lloyds share price can surely beat that approach.

A bit of economic brightness on the horizon?

There’s possibly some economic light beginning to show as we approach the deadline for securing a Brexit trade agreement. I don’t want to tempt fate, but JPMorgan this week put the chances of a deal at 80%. A trade deal would almost certainly help our battered economy, and that in turn would help the banks.

But no, I think the biggest reason for the Lloyds share price gains in November is straightforward. In my view, it’s a softening of the over-reaction that sent the shares plunging so deeply in the first place. I do think the banks deserved to be marked down by the economic damage caused by Covid-19. But investors do go overboard.

Was the extent of sell-off, which pushed Lloyds down more than 60% in September justified? I don’t think it was. And I reckon the return of what I see as a bit of rationality shows what a bad move it can be to sell a share just because it’s down.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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