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.
There have been a handful of articles lately presenting how one can protect their portfolio from the current trade war (hint, stay away from food companies and autos). But there have been many fewer saying how to buy into the trade war. The answer is that investors should buy less vulnerable sectors, such as semiconductors and biotechnology, which will not be as impacted by tariffs. Banks are also likely to prosper as the economy continues its run.
FINSUM: We think the idea of biotech and banks is quite a solid one. Both seem to have little direct exposure to tariffs.
Before President Trump got elected, and immediately after, there was a great deal of excitement that financial firms were going to experience a flourishing as the US cut back heavily on financial regulation. 500 days in that hope has failed to significantly materialize. While small and medium sized banks have benefitted, and the DOL’s fiduciary rule is gone (great for wealth management), large banks have not seen gains. For instance, the Fed has made stress tests for large banks more stringent.
FINSUM: Banks had the prop trading rules (Volcker rule) weakened recently, so that is positive, but otherwise there hasn’t been much change.
In what might be a sign of a rough patch to come for the global economy and markets, 16 of the largest global banks have collectively just entered a bear market, falling 20% from their peak. Those 16 come from among the 39 global “sifis”, or systemically important financial institutions. One research analyst says “If these banks are supposed to be systemically important then policymakers ought to be watching them to see what is happening”.
FINSUM: The odd part about these falls is that rising interest generally help banks, as they have wider net interest margins. So why the downturn?
A lot of financial industry participants have been hoping that the Trump administration might ultimately disassemble much of Dodd-Frank. Bits and pieces have been toned down so far, but the regulation remains mostly intact. Well, it seems like it is going to remain that way. SEC chief Jay Clayton just confirmed that while the SEC may seek to modify Dodd-Frank around the edges, there won’t be major changes. “I don’t think Dodd-Frank is changing a great deal, just to put a pin in it”, said Clayton.
FINSUM: Clearinghouses might see some changes, but otherwise Clayton seems fairly adamant that Dodd-Frank is staying put.