We’ve been recommending US Financials – mostly pushing bank stocks – for much of 2018, so today we have an update on what’s working in this sector.
First, the most basic measure: large cap US Financials:
- The S&P 500 is up 2.0% YTD and 1.9% in the last month
- The Financials sector of the 500 is up 1.5% YTD and 1.7% in the last month
Our take: Financials writ large have underperformed YTD, but like the market as a whole they are playing catch up of late. The S&P 500 owes its entire year to the Technology sector’s performance (+8.5%, and a 25% weighting), so ex-Tech the Financials stack up OK. Good, but not great.
And small cap US Financials:
- The S&P 600 is up 7.5% YTD and 4.4% in the last month
- The Financials’ piece of the 600 is +4.7% YTD and +5.6% in the last month
Our take: performance here is very similar to the Large Caps, lagging the broader averages but making some headway recently. Small caps have worked this year because of Health Care (+25% YTD, a 13% weight) and Energy (+17.5% YTD, 4% weight), so as with the Large Caps, Financials are pretty much a “Best of the rest”.
So what’s going on – did this call go wrong? Like the old X-Files tagline, “The truth is out there…” and there is better news than these results would indicate:
- The S&P Regional Bank Index is +10.5% on the year and +6.3% in the last month
- The S&P Banks Select Industry Index is 6.6% higher YTD, and +5.1% over the past month
- The KBW Regional Bank Index is +8.4% YTD, and +6.8% over the last month.
So if the Regionals are working, what’s not?
- Big banks/brokers are mixed bag: Goldman (-6.6% YTD, -5.5% last month), Citi (-4.5% YTD, +1.5% last month), and Wells (-8.9% YTD, +5.1% last month) are laggards. JPMorgan (+5.7% YTD, +1.4% last month), Bank of America (+4.6% YTD, +2.1% last month), and Morgan Stanley (+4.6% YTD, +0.8% last month) are doing better.
- The Insurance sector is getting hit as rates rise. The S&P Insurance Select Industry Index is only up 1.2% YTD, and down 0.5% in the last month. Even Berkshire Hathaway is having a tough year, essentially unchanged in 2018 and down 1.0% in the last month.
What to do now: we’re sticking with our Financials call, and bank stocks in particular. A few final thoughts:
- Super cap banks/brokers may get a bump in June when the results of the Fed’s Comprehensive Capital Analysis and Review process become public. This will be Fed Chair Jay Powell’s first CCAR in his new role, so markets will be looking to see if his approach to bank capital requirements differs from that of Janet Yellen.
- A steeper yield curve should help as well, buoying investor confidence that bank profits have not peaked. This is an important issue for the equity market as a whole, which we have outlined in prior notes.
- There’s been some focus lately on delinquency rates, but they are lower than the best levels of the prior cycle for everything from mortgages to credit cards and commercial/industrial loans. We’ll put out a separate note on those in the next few days.