Financials no longer stodgy
The S&P500 Financials GICS Level 1 is now down 2% in 2018 as of April 11, but the drop from the highs of the year in January is over 9%. Until the Great Recession of 2008, we never really thought of financials as that volatile, but many different factors have been pushing and pulling on the names in 2018.
First, we had the run-up in rates to almost 3% in mid-February, followed by a fall back to 2.73% in early April. Slowly rising higher rates help banks make a better spread on what they lend versus what they borrow. But we must admit that what really roiled the entire market was the talk of tariffs. Obviously, steel and aluminum tariffs don’t directly hit banks, but the concern is just an overall economic slowdown that will ultimately affect banks. Then, in the background, there are still rumblings of decreased regulation.
The actual core business likely has some puts and takes. Trading is better for big asset managers and trading shops while mortgages have fallen off with fewer re-financings and a tight housing market—all with the backdrop of solid 2%–3% GDP growth still forecasted for the year.
Will earnings season help or hurt? The good news is that the forward multiple for the group dropped to 13x from 15.5x in late 2017. Steady earnings and outlooks could help lower the volatility in the group. But the Trump administration’s policies remain a wildcard. Either way, Direxion has you covered with FAS (3X Bull Financials) and FAZ (3X Bear Financials).Take a look at how financials have done since the volatility started in early February. Note that they’re only slightly less volatile than the S&P500 as a whole.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestment.com. For standardized performance of SPXL and FAS go to or https://www.direxioninvestments.com/products/direxion-daily-financial-bull-3x-etf.
Where is the financial sector heading?
The financial sector has been one of the most profitable sectors since the Presidential inauguration. The industry has benefitted from expectations of lighter regulation, yield curve steepening, higher earnings, and more rate hikes. As of April 20, the sector has gained 20% since President Trump took office. After enjoying good returns last year, the financial sector got caught up in the market downturn in February. This is a growth-oriented sector, so any doubts about the economic growth of a country affects the sector adversely.
However, the recent 4Q17 performance and net inflows compensated for the financial sector decline after the market turmoil. The chart below from Seeking Alpha shows that the financial sector saw the most significant inflows of $4.3 billion in 4Q17 and 2017, driven by various macro tailwinds.
Will earnings season help or hurt the financial sector?
The sector is poised for higher earnings in 1Q18 as well. An April 20 FactSet report states that the blended earnings growth rate for 1Q18 for the S&P 500 increased from 17.1% to 18.3%, driven by the positive earnings surprise for the financial sector. Goldman Sachs (GS), Morgan Stanley (MS), and Bank of America (BAC) reported positive earnings surprises for the quarter. With 17% of companies in the S&P 500 having reported earnings, the financial sector has reported the third-highest (year-over-year) earnings growth at 24.8%.
Even though the sector is down 0.2% year-to-date[1.As of April 20.], it’s poised for better momentum in 2018, driven by higher interest rates, prospects of deregulation, and higher earnings. A tight labor market, strong fundamentals, and solid economic growth could boost the sector in 2018. However, rapidly increasing interest rates and a flattening yield curve could prove to be headwinds for the sector.