Is the Lloyds share price a buy or a sell as recession fears mount?

On the surface, the Lloyds share price is a bargain. The underlying business is hugely profitable, yet the stock still trades below pre-pandemic levels. But its status as a bellwether of the UK economy could see it hit by fears of a recession and the mounting cost of living.

The Lloyds [LLOY.L] share price is a potential bargain right now. The stock plunged at the outset of the pandemic and still hasn’t recovered even though the underlying business is hugely profitable. On the face of it, Lloyds stock should be climbing higher, but as a bellwether of the UK economy, fears of an impending recession and rising living costs could mean it remains depressed in the short to medium term.

Weighing up whether now is a good time to buy or sell shares in Lloyds is a tricky business. We look at the investment case for both sides of the argument.

Lloyds share price hasn’t fully recovered from pandemic levels

The Lloyds share price took a pummelling during the pandemic. After starting 2020 at more than 56p a share, the stock traded for most of the year between 23p and 30p. Rattled shareholders had to wait until September 2021 before the stock once again topped 50p.

Whether the cost of living crisis does the same economic damage as the pandemic will go a long way into determining the direction of the Lloyds share price. So far this year the stock has fallen 8.5%, closing Friday 2 September at 43.72p. It reached a 52-week low of just 38.1p in March and neared this point again in July.

Should investors buy Lloyds at its current share price?

Lloyds’ newest board member believes it’s a decent time to pick up shares. Non-executive director Scott Wheway was only appointed on 1 August but wasted no time in picking up 150,000 shares in the bank. Wheway, who also chairs the board of British Gas owner Centrica [CNA.L], picked up the stock in late August for 48.3p a share. But should investors follow suit?

Financially, the bank looks rock solid. Net income in the first half of the year came in at £8.5bn, up 12.5% year-over-year. The Bank of England hiking up interest rates should also mean higher profit margins for Lloyds. Strategically, things are changing at Lloyds. CEO Charlie Nunn announced in February an ambitious new strategy to grow business profitability. This includes diversifying the bank’s revenue streams, which should make it more resilient to a downturn in the economy.

Analysts also see further upside in the stock. The Lloyds share price has a median 60.5p median target from the 18 analysts polled on the Financial Times, representing a 38.4% upside on Friday’s close. Even the lowest analyst price target of 45p would suggest a 2.9% upside.

Is there a case to sell Lloyds at its current price?

As the UK’s biggest mortgage provider Lloyds will be affected by any slowdown in the housing market. In August, house price growth slowed in August to 10%. While that’s still double-digit growth, there have been reports of cooling in new mortgage approvals and surveyor enquiries.

Another threat is that higher energy costs will squeeze household finances and trigger a spate of defaults on mortgage payments. Much will depend on how far the government is prepared to intervene to support struggling households.

Then there’s the concern that Lloyds shares are a value trap. On the surface it is a profitable business whose shares are trading for pennies with a low price-to-earnings ratio. However, aside from a brief rally at the start of this year, the stock has been trapped in the 40–50p range since April last year. Considering the mounting gloom around the UK economy it’s difficult to pinpoint a clear catalyst that will send the stock back above the 50p barrier.

Ultimately, a recession is never good news for banks and Lloyds shares are likely to experience some volatility if one happens. Cautious investors may want to see if things settle down in the economy before buying Lloyds stock. However, for bargain hunters the current levels could represent a buying opportunity, even if the gains aren’t realised for a while.