Bank shares may be a good indicator of where investors think the economy is headed.

Most of the time, banking is booming during expansion periods and is hit hard during contractions as consumers grapple to repay debts. They are also sensitive to interest rates, determining how much money banks can make off of loans.

The Omicron variant forced a dip in stocks like Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) when it was first announced, but they’ve rebounded since then.

The path to reining in inflation without sabotaging the economy will once again be clear if traders are correct.

The Omicron variant has yet to impact consumer spending, according to Bank of America CEO Brian Moynihan. "We're not seeing any behavior change here," Moynihan said.

Charles Scharf, CEO of Wells Fargo, predicted that spending would remain strong in 2022. Cash isn't just for affluent customers, he said.

Scharf said consumer deposit accounts are 30% to 35% bigger today than before COVID-19. It applies to all wealth levels, so it's not just the wealthy.

There were concerns when Americans' confidence in their finances and the economy fell to a decade low in November. Several recent polls suggest people are still feeling pretty pessimistic.

Bank leaders, however, point to a gap between concerns about inflation and actual behavior.
Heagerty said that bank CEOs urge consumers to judge them by their actions rather than what they say. "Consumers are spending a lot of money even if they claim they’re not particularly happy," Heagerty said.

"In our view, interest rates will increase several times next year, possibly as early as mid-year," Moynihan said. 

For now, banks maintain that's not true. Banks would be concerned if interest rates were due to increase, but the economy weakened.

Lenders will closely watch what happens next, given the possibility of a policy error as the Fed accelerates the pace at which it pulls unprecedented levels of stimulus. Heagerty said that if the Federal Reserve raises rates too quickly, it could be highly detrimental.

Until investors have confidence in the economy's ability to maintain growth and the Fed's ability to manage its next moves successfully, bank shares, up 38% this year, are likely to continue rising. That's certainly been the case this week.