Show us the money

06/21/19
  • Some financial stocks have stumbled amid a possible rate-cutting cycle
  • The dependency of financials on interest rates is not always cut-and-dried
  • The VIX registered “anxiety” as the SPX hit a new high yesterday

No one likes being left off the invitation list of the year’s biggest party, but in a way, that’s what happened to financial stocks recently.

With some modest cork-popping happening yesterday—the S&P 500 (SPX) hit a record intraday high of 2,958.06—financial stocks were alone at home, curled up on the couch with a good book, wondering who they offended. They were the weakest pocket of the SPX, down around -0.4% halfway through the trading session while the SPX was up by roughly the same amount.

S&P 500 (SPX), JPMorgan Chase (JPM), Bank of America (BAC), 6/3/19–6/20/19. Banks stocks with S&P 500, price chart.S&P rallies, banks dally.

Source: Power E*TRADE


To get a feel for the recent dynamic in many financial stocks, the chart above shows two big banks, JPMorgan Chase (JPM) and Bank of America (BAC), both of which have more or less stayed put the past couple of weeks as the SPX scaled new heights.

This disconnect between the broad market and financials loses any mystery it may have had in light of the Federal Reserve’s interest rate announcement on Wednesday. As expected, the Fed appeared to grease the skids for a future rate cut, possibly as soon as next month.1

While the stock market tends to like lower interest rates—and hence the generally warm reception to the news—one area that isn’t particularly fond of them is the financial sector, especially banks, which are generally more profitable when they can lend money at higher interest rates. Lower rates, lower profits. OK, fine.

This dynamic, in fact, was the reason so many analysts forecasted in late 2017 that financials would be one of the hot sectors of 2018, since the Fed was expected to continue its rate-hiking cycle.

If the Street decides a certain number of rate cuts have been baked into the market pie, it could develop a greater appetite for financial stocks.

Here’s the rub: It wasn’t a great year for the market, period, but the financial sector ended 2018 toward the bottom of the SPX pile,2 and as of yesterday it was one of only three SPX sectors in the red over the past 12 months.

But here’s a second rub, going the other way: Although it’s lagging the broad market, the financial sector is up around 14% in 2019, and while the possibility of imminent rate cuts may have scared away some bulls the past couple of weeks, 2018 showed that rates aren’t necessarily the final word on the fate of financial stocks.

At some point, the Fed will either stop cutting rates or begin hiking them—and around and around we go. (That’s why they’re called rate-cutting or rate-hiking “cycles,” after all.) If the market decides a certain number of rate cuts have been sufficiently baked into the market pie, the Street could develop a greater appetite for financials, well before the cuts themselves have ended.

Market Mover Update: You’re probably already tired of hearing that the S&P 500 (SPX) hit an all-time high yesterday, but you probably didn’t hear that the CBOE Volatility Index (VIX)—the market’s favorite “fear gauge”—also traded up yesterday. The VIX typically declines when the market rallies; when it instead rallies along with the SPX, it can reflect underlying anxiety that is sometimes followed by a stock-market pullback, if only for a day.

In the past year there have been 11 other days, like yesterday, that the SPX hit a 30-day (or longer) closing high while the VIX also closed higher. The SPX closed lower the next day seven times out of 11.3

Iran’s downing of a US drone stoked Middle East tensions and pumped up oil prices more than 6% intraday—the biggest one-day gain this year. The August WTI crude oil futures (CLQ9) jumped to a three-week high of $57.37.

Today’s numbers (all times ET): Existing Home Sales (10:00 a.m.)

Today’s earnings include: Carmax (KMX).

 

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1 Reuters. US STOCKS-S&P 500 hits all-time high as Fed signals rate cuts. 6/20/19.

2 Bespoke. S&P 500 Sector Performance — 2019 vs. 2018. 1/10/19.

3 Supporting document available upon request.

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