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Expect More Turmoil For Banks In The Near Term

From Brad Hoppmann: The action in markets last week, and again today, can perhaps best be described in a single word: Stalled.

Last Tuesday’s 1%-plus decline nearly across the board was the first such decline in the major averages in 110 trading sessions. So, to say we were overdue for a pullback is to state the obvious.

Yet since that sell-off, markets have basically traded only modestly lower. And that’s despite the major blow dealt to the Trump agenda in the form of the defeat of healthcare reform.

One sector that has seen more than its share of selling of late also happens to be the sector that’s led the Trump rally higher, and that sector is banks and financials.

Indeed, the gains in large-cap banks and financials, as well as those in regional banks, have been stellar.

Over the past six months, the SPDR S&P Bank ETF (KBE) is up 27.3% while the SPDR S&P Regional Bank ETF (KRE) is up 27.7%.

Those numbers dwarf the gains in the SPDR S&P 500 ETF (SPY) of just 9.1% during the past six months.

Although the SPY is down, it’s only off 1.3%. Meanwhile, KBE is down 7.5% while KRE fell 8.1% during the past month.Yet if we look at the performance of these three funds over the past month, the story is markedly different.

And if we look at the performance over the past week, we can really see the disparity …

Over the past five trading sessions, SPY is down 1.3% while KBE slid nearly 4.9%. KRE is in even worse shape, dropping 5.3% in that time.

Now the market is asking itself an important question:

Is this marked underperformance of banks and financials going to continue, or is the selling just about over?

One leading advocate for the camp that argues that banks and financials are headed lower from here is famed bank analyst Dick Bove.

Bove is vice president of equity research at Rafferty Capital Markets. In a recent interview with CNBC, he offered the following assessment of the current bank stock action, and the sector’s future:

“There’s a reason why all these bank stocks are cratering. It’s because of the belief that none of the Trump programs will be put into effect.

“The understanding is growing that all of the reasons that people had for buying bank stocks in November are dissipating, they’re gone …

“If you’re not going to get tax cuts, if you’re not going to get fiscal stimulus, if day-to-day business is lousy right now, which it is … if the recognition of all of these factors suddenly dawned on the investor, they do what they’re doing right now — they pile out at the exits, they take their profits.”

Sure, last week’s policy failure on healthcare reform was certainly a blow to the Trump agenda.

However, I think it may be a bit premature to write the obituary on the rest of the Trump agenda. Particularly when it comes to tax cuts and infrastructure spending.

The article cites positives such as higher interest rates and less regulation of the industry as key drivers of bank stocks going forward.On the flipside of the Bove coin is the sentiment laid out in a recent Wall Street Journal article titled, “Bank Stock Party Isn’t Over After Pullback.”

The Federal Reserve appears set to raise rates two or three more times this year. For now, most banks benefit more from increases in short-term rates than long-term ones since many loans are priced against short-term benchmarks.

As for regulation, the article says big regulatory reform, such as scaling back enforcement of the so-called Volcker rule (which bars proprietary trading by depository institutions) would help the biggest Wall Street banks.

And, it suggests that these banks also are good values here.

Per the WSJ:

For example, Bank of America (BAC) and Citigroup (C) continue to trade at discounts to book value. The rest of the pack isn’t demanding either in overall terms, with the KBW bank index, having hovered just around book value for the past several years, now fetching 1.2 times book value.

So, higher interest rates, deregulation and valuation is the argument here for a continuation of the bank stock rally following the current pause.

Both viewpoints could be turn out to be right.

In the shorter term, banks are likely to suffer more selling from the unwind of the Trump-agenda trade and the healthcare misfire last week.

In the medium and longer terms, the rising-rate environment, the president’s penchant for less bank regulation, an improving economy and those attractive valuations this latest sell-off is producing will be a good buying opportunity in banks …

Provided, of course, you are prepared to handle the short-term volatility.

The SPDR KBW Bank ETF (NYSE:KBE) was unchanged in premarket trading Tuesday. Year-to-date, KBE has declined -3.86%, versus a 4.51% rise in the benchmark S&P 500 index during the same period.

KBE currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #20 of 38 ETFs in the Financial Equities ETFs category.

This article is brought to you courtesy of Uncommon Wisdom Daily.

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