Banks have certainly been the red-headed stepchild of equity investment in 2020.

While technology shares have rocketed by two, three, and four-fold, banks have remained mire in the muck, down 35% on the year while the S&P 500 is up 6%.

However, all that is about to change.

Banks have become the call option on a US economic recovery. When the economic data runs hot, banks rally. When it’s cold, they sell-off. So, in recent months bank share prices have been flat-lining.

You have to now ask the question of when the data stay hot, how high will banks run?

There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, or a quality sector in the bargain basement? Big institutions have already decided what to do and are buying every dip.

Banks certainly took it on the nose with the onset of the pandemic. Interest rates went to zero and loan default rates soared, demanding a massive increase in loan loss provisions.

Much more stringent accounting rules also kicked in during January known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.

Then in June, the Federal Reserve banned bank share buybacks and froze dividends to preserve capital in expectation of more loan defaults.

So what happens next?

For a start, fall down on your knees and thank Dodd-Frank, the Obama era financial regulation bill.

Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.

That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.

Thanks to government efforts to bring the current Great Depression to a quick end, generous fees have been raining down on the banks from the numerous loan programs they are helping to implement.

And trading profits? You may have noticed that options trading volume is up a monster 95% so far in 2020 and increased by a positively meteoric 120% in August. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing, that’s why.

I list below my favorite bank investments using the logic that during depressions, you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.

JP Morgan (JPM) – Is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.

Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits, as (GS) is still mired in the aftermath of the $5 billion Malaysia scandal.

Bank of America (BAC) - is another quality play with a fortress balance sheet.

Citigroup (C) – Is the leveraged play in the sector with a slightly weaker balance sheet and more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This week’s revelation of a surprise $900 million “operational loss” and the penalties to follow knocked 13% of the share price. This is the high volatility play in the sector.

And what about Wells Fargo (WFC), you may ask, the cheapest bank of all? Unfortunately, it still has to wear a hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss. Oh, and Warren Buffet is selling too.

The One