Can Banks Stocks Show What's Next for Dow 14,000?

History shows that bank shares are reliable indicators of what’s next for the economy.

In this photo from Dec. 19, 2012, people walk past a Bank of America branch in Philadelphia.
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With conditions improving and banks lending more to Main Street borrowers, especially in the form of home mortgages, blue-chip companies of the Dow are also seeing demand rise and are starting to invest cash they have hoarded since the crash.

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As the Dow nears all-time highs, the banks, hardest hit in the downturn, remain far below their peaks. "The banks could end up taking a smaller percentage of the total market capitalization than they did at the peak before the crash," says Lazard's Hogan. The financial sector's overall share of the Standard & Poor's 500 valuation peaked at 22 percent in 2006 and is now at about 15 percent.

So it's the direction of the bank-sector index, not the overall market value, that's most important now. In an economy that's made up largely of services, it's bank credit that provides the rails that carry the recovery. Another key to this recovery could be the part of the economy that goes nowhere, the real estate owned by Americans. "The banks play a central role in housing finance and they were not lending because of all that uncertainty. But the lending goes up because real estate goes up. And we are seeing it now. That feeling of well-being is returning," he says.