In that we don't view this blog -- being directed at our clients -- as "financial media", in a broad, universal, sense, we're willing to tip our hand (while never outright predicting, mind you) herein as we clue our clients in on what we're thinking.
With that in mind, this week we thought we'd share a little of our internal recorded dialogue. We've found it important, and ultimately instructive, to make record of what we're thinking as we move through various market cycles.
Below is the latest on the financial sector (it's presently tied with industrials as our highest target weighting), along with highlights of our view on bonds and gold.
While you'll sense both bullishness and bearishness in the following, understand that while there is indeed strong opinion exhibited, we, per the opening paragraph, remain profoundly humble. I mean, if we always got it right... well... this morning's headline would feature yours truly, instead of Amazon's founder (Jeff Bezos surpasses Bill Gates as world's richest person). And, while I do love you readers, I'd be doing something else this morning
Sector Assessments 7/14/17
FINANCIALS:
After a stellar run from the election to year-end ’16 (presumably spawned by Trump’s promise of reg reform, the prospects for economic growth and higher interest rates, along with cheap valuations), the sector was basically flat until recent weeks. The result of "stress tests" inspired the Fed to allow banks to raise dividends and buy back shares, causing a several point pop in shares across the board on the news. In recent weeks, financials seem to have been the beneficiaries of a rotation out of tech stocks. However, as of late, tech has regained its speed, while banks’ momentum has moderated a bit.
After a stellar run from the election to year-end ’16 (presumably spawned by Trump’s promise of reg reform, the prospects for economic growth and higher interest rates, along with cheap valuations), the sector was basically flat until recent weeks. The result of "stress tests" inspired the Fed to allow banks to raise dividends and buy back shares, causing a several point pop in shares across the board on the news. In recent weeks, financials seem to have been the beneficiaries of a rotation out of tech stocks. However, as of late, tech has regained its speed, while banks’ momentum has moderated a bit.
This week Janet Yellen, before Congress, softened the
outlook on interest rate hikes going forward. Banks traded off on that
revelation. This morning, several institutions reported earnings that beat, but each had its
area of disappointment – generally, net interest margin and/or trading fees.
While the market rallied nicely, banks contracted on the day.
At 13 times this year’s earnings, financials are the second
cheapest sector, behind telecom. Our 7/11 technical analysis shows xlf trading
above its 50 and 200 smas, the 50 sma is threatening to retake the 100, and the 200
sma is sloping higher.
The economic backdrop is bullish for financials if they’re
to ultimately rally on higher rates. In terms of trading volume, if banks indeed make
hay on high volume, that’s simply an inevitability. Recency bias is
presently rampant with regard to volatility – I keep seeing headlines
predicting more super low volatility going forward. When it shifts it could be
dramatic; the increased trading would help bank earnings… Trump needs a policy
win in the worst way… If he moves on to the promised financial reg rollback,
banks could rally hard…
The Fed met this week, left rates unchanged and hinted that
balance sheet roll-off will begin soon. Bonds traded higher on the news,
financials traded slightly lower throughout the day, gold rallied hard. I find
the present market setup provides an unusual opportunity for folks buying/owning
financials going forward, provided the following occurs:
1. The economy continues to grow at present or stronger pace well into 2018
2. In the near-term, the government gets past the coming debt ceiling debate smoothly
3. Trump moves financial regulatory reform to the top of the agenda
4. Inflation pushes 2%
5. The Fed raises rates in response to 1 and 4
6. The dollar appreciates at a pace that doesn’t spook the Fed when it comes time to more aggressively raise rates
I see the above points coming together as a better than 50/50
probability (recognizing that the "move" referenced in #3 may not result in the sectors' desired outcome) during the course of this year. As, and if, that becomes clear, I
believe money could rush in volume to the financial sector, and – as was the
case for a couple of weeks recently – from the tech sector…
BONDS: 7/26/17
The six points I made with regard to financials can be expanded upon (recognizing the two additional points regarding govt policy as wild cards) to create an exceedingly negative scenario for bonds:
The six points I made with regard to financials can be expanded upon (recognizing the two additional points regarding govt policy as wild cards) to create an exceedingly negative scenario for bonds:
1. The economy continues to grow at present or stronger pace well into 2018
2. In the near-term, the government gets past the coming debt ceiling debate smoothly
3. Trump moves financial regulatory reform to the top of the agenda
4. Trump and company gets a credible tax reform package passed
5. Trump and company gets an infrastructure bill passed (funded by bond issuance)
6. Inflation pushes 2%
7. The Fed raises rates in response to the above
8. The dollar appreciates at a pace that doesn’t spook the Fed when it comes time to more aggressively raise rates
9. The fed makes legitimate efforts to reduce their balance sheet
GOLD: 7/26/17
Gold rallied hard today on the Fed’s dovish post-meeting
commentary. The nine possibilities I outlined under bonds paint a
resoundingly bearish picture for gold as well (emphasizing an appreciating dollar).
By the way, every point mentioned above can be turned bearish by simply inserting "doesn't" into the sentence. Hence the uncertainty of it all. I.e., gotta stay open to all possibilities!1. The economy continues to grow at present or stronger pace well into 2018
2. In the near-term, the government gets past the coming debt ceiling debate smoothly
3. Trump moves financial regulatory reform to the top of the agenda
4. Trump and company gets a credible tax reform package passed
5. Trump and company gets an infrastructure bill passed (funded by bond issuance)
6. Inflation pushes 2%
7. The Fed raises rates in response to the above
8. The dollar appreciates at a pace that doesn’t spook the Fed when it comes time to more aggressively raise rates
9. The fed makes legitimate efforts to reduce their balance sheet
Have a nice weekend!
Marty
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