Displaying items by tag: financials

(New York)

We have been hearing it for a couple of months now—it is time for financial stocks to shine. Yet, financial shares are having a pretty poor year. The reason appears to be the flattened yield curve. However, a new academic study finds that it is not primarily the yield curve, but rather short-term rates alone that dictate most of financial share performance. The spread between government and corporate bonds is also a factor. Looking at historical performance of financials as compared to rates, it seems like financial shares are about 9% below their fair value.

FINSUM: As our readers will know, we are not fond of historically-driven strategies, but we do give this one credit in that it is finally a new way of looking at the situation in bank shares.

(New York)

Whether investors like it or not, it appears a real trade war has begun. While the US-China spat is getting the most headlines, including President Trump enacting blockages to Chinese investment into the US, we are also putting tariffs on other major trading partners like Canada and the EU. With this new reality taking hold, here are four ETFs that will thrive in the trade war. The first two are the Financial Sector SPDR and the SPDR S&P Regional Banking ETF because Financials are a “screaming buy” according to BNY Mellon Investment Management. Bank revenues are very healthy and the sector is insulated from trade war. The final choice is the Invesco S&P SmallCap Industrials, which will prosper as the economy expands and whose constituents have much lower international exposure versus their larger cap peers.

FINSUM: These seem like well-thought and diversified choices. We are slightly nervous about financial stocks at the moment because of the yield curve, but small caps definitely seem like an excellent choice.

(New York)

Bank shares have been getting brutalized. S&P 500 financial shares are down 12% since their peak in January, and have lost ground 12 says in a row, the longest run ever. JP Morgan’s share price is now below its 200 day moving average, a key technical level. The flattening yield curve has been weighing on the shares even as investors get ready for a flurry of dividends and buybacks from the sector. So far banks have avoided seeing declines in their net interest margins, but that can only last for a time.

FINSUM: Banks trade with the direction of the economy, and a flatter yield curve is both a predictor of recession and directly bad for bank earnings.

(New York)

That headline might have played with your mind a bit, and rightly so. Since financials generally trade alongside the direction of the economy, buying them ahead of a recession seems like folly. However, the truth is that financials tend to perform strongly for the 18 months that follow a yield curve inversion (or near one). Inversions do tend to strongly signal a forthcoming recession, but it generally takes 18.5 months from when it happens for the cycle to actually reach its peak, a period when stocks had median gains of 21%.

FINSUM: So this is a purely historical performance-based article, which is always dicey. However, it is a good point that the length of time between a yield curve inversion and a growth peak can be considerable.

(New York)

Investors who own bank stocks or ETFs have probably been shocked over the last couple of days. The financial sector lost 4% yesterday alone. Many may be wondering why. While no one is quite sure, there do seem to be some concrete reasons, and not just because of the Italian drama. The bigger culprit is likely because of tumbling US Treasury yields, which have fallen from well above 3%, to well below 2.9%. Banks stocks have historically performed poorly in periods of flattening yield curves. Lower rates and yields hurt banks’ net interest margin.

FINSUM: US banks have very little exposure to Italy, so there is no reason for any meltdown fears, yet the sector has reacted almost overly strongly. It seems the only explanation has to do with US yields falling.