Markets are having a very rough day. Both the S&P500 and the Dow are down almost 3%. Financials have been leading losses. The selloff appears to be centered on fears over the fragility of the US-China trade “truce”. Treasury bonds have been rallying, leading to selloffs in tech and banks. The Treasury curve started to invert yesterday, which also seems to have spooked investors.
FINSUM: What a difference a day makes! Just yesterday it seemed like stocks might be lined up for a nice end of year run. A day later, the trade trace has created more tension than before and the yield curve is starting to invert.
The biggest and most famous investor of them all just took a big position in US financials. In particular, Warren Buffett just made a large investment in JP Morgan to the tune of $4 bn. Buffett already holds a $23 bn position in Wells Fargo. Berkshire Hathaway has a history of making successful investments in banks, including in Bank of America. Buffett also boosted its holdings in BAC, Goldman Sachs, and US Bancorp.
FINSUM: Rising rates are good for banks. Recessions are not. The risk and reward is clear.
One of the big questions investors and analysts are still trying to sort out is who are the biggest market winners and losers as a result of the midterms. Here are some insights. The sector which seems likely to gain most is healthcare, as the risk of more regulation looks diminished, and the chances of increased government healthcare spending (as a result of the election of Democrats in key states) seems higher. The sectors which seem likely to lose out are banks and telecoms, both which seem likely to face much greater scrutiny by the now Democrat-led House.
FINSUM: We would also lump big tech into the losers category as increased scrutiny and regulation of the sector is one of the few areas of bipartisan agreement right now.
With the midterms finally over, investors need to think critically about how the market will respond. In particular, specific sectors will have different reactions. With that in mind here are six sectors to watch. Drugmakers seem likely to be seen favorably as the split between the parties means new regulation governing prices seems less likely. Banks could go either way, but most expect Trump’s deregulatory agenda to continue. Technology is looking less favorable as regulation and scrutiny of the sector is one of the few areas of bipartisan agreement. Industrials are looking less favorable as well, as the odds of a big infrastructure package have decreased. Energy seems neutral, as no big changes appear likely. Finally, marijuana stocks are likely to jump.
FINSUM: There is going to be quite a range of reactions over the next few months as each sector digests how the newly split Congress will affect them.
If one thing is apparent about the Fed, it is that Jerome Powell and his team are much more hawkish than Yellen or Bernanke. Therefore, it looks like rates are going to continue to rise (even in the face of a market protest, such as is occurring). With that in mind, investors need to find ways to hedge their portfolios or profit from rising rates. One area to look is at bank ETFs. Banks tend to do well as interest rates rise as the lift in rates boosts their net interest margins, a key source of revenue for the sector. Accordingly, take a look at the Financial Select Sector SPDR Fund (XLF) and the SPDR S&P Regional Banking ETF (KRE), both of which had been attracting capital. Additionally, see the First Trust Nasdaq Bank ETF (FTXO), Invesco KBW Bank ETF (KBWB), and the SPDR S&P Bank ETF (KBE).
FINSUM: Banks stocks seem to be a good buy so long as we don’t get an inverted yield curve.